Abdulrahman Abdulfattah
Dr. Michael A. Nelson
Applied Econometrics
06 May 2016
Econometrics Project
I. Introduction
Human capital is one of the main factors of economic growth and plays an important role in the productivity and technological progress of countries.Human capital has a direct effect on economic growth because individuals with more education are more productive and innovative which leads to the creation of new products. Moreover, human capital is vital to Research and Development (R&D), which boosts innovation and technological progress, thus leading to increased productivity and creation of newproducts(Jiménez,Matus and Martínez (2014)). The purpose of this paper is to examine the hypothesis that human capital, which consists of education, health and wellness, workforce and employment, and enabling environment, have a positive effect on economic growth.
This is an interesting question to study because human capital may play a determinant role in economies growth, sinceeducated and healthy individuals aremore likely to boost the economic growth of the country (Olimpia (2013)).As human capital attainment is costly and varies largely across countries, I aim to examine whether it is worth it for a country to invest in human capital or not. In other words, I aim to examine whether spending great deal of money in human capital will result in boosting economic growth in the country. Based on the results, a decision could be made about whether a country should invest in human capital or it is not worth investing and spending lots of money on.
Abdulfattah 2
II. Literature Review
Jiménez,Matus and Martínez (2014) investigated the effects of an active population, human capital and technology on economic growth in Mexico. A data series from 1991 to 2010 was analyzedand a Cobb–Douglas function under the Solow model was considered. The results show that education, mobile phone access, computer and internet access, income per capita, educational expenditures and population agglomerations have positive impacts on economic growth. Also, it was recommended that Public policies in Mexico should promote educationalinvestments in human capital and technology that lead to economic growth through innovation.
Olimpia (2013) examined several econometric models to explain the relationship between human capital and economic output. Using World Bank data, 17 countries with the fastest economic growth rate during 1960-2010 were selected. Four econometric models are tested to explain the effects of human capital on economic growth. The paper demonstrates that human capital, in the two components (education and health), in countries with a fast growth rate, are positively and strongly related to the economic growth. The results show that both expressions of human capital, the enrollment rate in secondary education and the life expectancy, have a positive impact on economic growth. Education and lifeexpectancy are positively and strongly associated in most countries.
I aim to test my hypothesis based on the findings of Jiménez,Matus and Martínez (2014) and Olimpia (2013) regarding the positive impact of human capital on economic growth. In addition, it is interesting to understand what other factors might contribute and boost the economic growth of a country. In this paper, I will examine six other variables: Capital stock, political stability, innovation, government effectiveness, corruption and population size.
Abdulfattah 3
Theoretical Model
Y = f (K,L) (1)
The theory will be based on Solow growth model, which is designed to show how growth in the capital stock, labor force and technology interact in an economy and affect GDP.
III. The Model
The data used in this study comes from the Global Economy collected by the World Bank and all the data from the year 2013.The econometric model used is as follows:
GROWTH = 0+ 1 HUMAN + 2CAPITAL + 3STABILITY + 4INNOVATION
+5GOVERNMENT + 6 CORRUPT + 7LOGPOP
GROWTH annual percentage growth rate of GDP in 2013.
HUMAN the index assesses human capital, which consists of education, health, employment and environment, on scale from 0 (worst) to 100 (best) and across 5 distinct age groups. This is expected to have a positive effect on growth because individuals with more education are more productive and innovative which eventuallylead to growth.
CAPITALcapital investments measured in billions of dollars, which consists of the fixed assets of the economy plus net changes in the level of inventories. This is expected to have a positive sign because the more resources and assets, the more output produced, thus boosting growth.
STABILITYgovernment stability index (-2.5 weak; 2.5 strong). The index reflects the likelihood of a disorderly transfer of government power, armed conflict, violent demonstrations, international tensions, terrorism, etc. This is expected to have a positive sign because stability promotes free market exchange, thus boosting growth.
Abdulfattah 4
INNOVATIONthe Global Innovation Index includes two sub-indices: The first sub-index is based on five pillars: Institutions, Human capital and research, Infrastructure, Market sophistication, and Business sophistication. The second sub-index is based on two pillars: Knowledge and technology outputs and Creative outputs. This is expected to have a positive sign
because the more innovative the country will boost economic growth by creating and producing new products.
GOVERNMENT government effectiveness index (-2.5 weak; 2.5 strong). This is expected to have a positive sign because the more effective the government will lead to higher income and employment, thus boosting economic growth.
CORRUPTcorruption perceptions index, 100 = no corruption. The Corruption Perceptions Index is an indicator of perceptions of public sector corruption, i.e. administrative and political corruption. This is expected to have a negative sign because the more corrupt the government will lead to less efficiency and productivity, thus less economic growth.
LOGPOPpopulation size (log). This is expected to have a positive sign because the more labors in an economy, the more output produced, thus boosting economic growth.
Abdulfattah 5
IV. Data Table
Variable / Definition / SourceHuman –
World Economic Forum / World Economic Forum index assesses human capitalon scale from 0 (worst) to 100 (best) / World Economic Forum1
Capital –
World Bank / capital investments measured in billions of dollars, which consists of fixed assets of the economy plus net changes in the level of inventories / World Bank2
Stability –
Global Economy / Global Economy index (-2.5 weak; 2.5 strong). The index reflect the likelihood of a disorderly transfer of government power, armed conflict, violent demonstrations, etc. / Global Economy3
Innovation –
Global Economy / the Global Innovation Index includes Institutions, Human capital and research, Infrastructure, Market sophistication, etc. / Global Economy3
Government –
Global Economy / Global Economy index (-2.5 weak; 2.5 strong)government effectiveness / Global Economy3
Corrupt –
Transparency International / corruption perceptions index, 100 = no corruption. The Corruption Perceptions Index is an indicator of perceptions of public sector corruption, i.e. administrative and political corruption / Transparency International4
Pop-
World Bank / World Bank. Population size, in millions. / World Bank2
Notes:
Abdulfattah 6
V. Results
TABLE 1Human Capital and Economic Growth: Base Model
(Dependent variable: ECONOMIC GROWTH)
Human Capital [HUMAN] / -2.492**
(-2.72)
Capital Stock [CAPITAL] / 0.090
(1.13)
Political Stability [STABILITY] / 0.408
(0.77)
Corruption [Corrupt] / -0.026
(-0.83)
Population [LOGPOP] / 0.115
(0.59)
R-Squared / 0.22
Adjusted R-Squared / 0.18
Number of Observations / 119
Note: The figures in parentheses are t-statistics expressed in absolute value;
** and *, respectively, denote statistical significance at the 5%(or better) and 10% levels.
Due to multicollinearity, I have eliminated INNOVATION and GOVERNMENT variables because these variables are highly correlated with human capital. For example, the correlation table shows that human capital has a correlation of (0.930) with INNOVATION and (0.926) with GOVERNMENT. After adjusting the model, the resultsshow that human capital is statistically significant and all the other variables are not statistically significant. However, human capital has a negative sign which is unpromising and unexpected. One of the possible reasons for human capital to have a negative coefficient with economic growth is that countries with high
Abdulfattah 7
human capital index tend to have a low economic growth, based on the data, compared to countries with low human capital index. For example, Ethiopia’s economic growth is 10.58 percent with a human capital index of -0.961. Whereas Finland economic growth is -1.12 percent with a human capital index of 1.406.
On the other hand, all the other variables (CAPITAL, STABILITY, CORRUPT, LOGPOP) have the expected signs but not statistically significant. An increase of one point on the STABILITY index increases percentage growth rate of GDP by 0.408. An increase of one point on the CORRUPT index decreases growth rate by 0.026. An increase of one percent on the LOGPOP increases growth rate by 0.11.To sum up, the results are unfavorable and unpromising regarding my hypothesis about economic growth and human capital due to the possible reason that I mentioned in the previous paragraph. It also did not match or agree with the results that is found by Jiménez,Matus and Martínez (2014) and Olimpia (2013) regarding human capital and economic growth. Consequently, I conclude that human capital has a negative impact on economic growth based on the enormous variation of the data and unexpected high growth in many countries.
VI. Conclusion
In this paper, I examined the hypothesis that human capital has a positive effect on economic growth. I also examined six other variables: Capital stock, political stability, innovation, government effectiveness, corruption and population size. However, it resulted in high correlation between human capital and two other variables, thus I excluded these two variables. After adjusting the model, the results looked unpredicted and unpromising regarding the effect of human capital and economic growth, which contradicts with my hypothesis and the
Abdulfattah 8
findings of Jiménez,Matus and Martínez (2014) and Olimpia (2013), and I explained one of the possible and likely reason for that unexpected result. Nevertheless, all the other variables have the expected signs but not statistically significant.
There are some limitations to this study. This study assumes that only five factors contribute to the economic growth of all countries used in this study, whereas there are many other factors that should be considered in terms of economic growth of a country. In this study, African and southeast Asian countries tend to have high economic growth and low human capital index, whereas European countries tend to have a low economic growth and high human capital index, which ended up with unfavorable and unpredicted results. In the future, I may use a specific region or pooled countries in order to get more favorable results.
Abdulfattah 9
References
Jiménez, Martha, Jaime Arturo Matus, and Miguel Angel Martínez. 2014. "Economic growth as a function of human capital, internet and work."Applied Economics46, no. 26: 3202-3210.Business Source Complete, EBSCOhost(accessed April 12, 2016).
Olimpia, Neagu. 2013. "HUMAN CAPITAL: CAUSE AND EFFECT OF THE ECONOMIC GROWTH. AN EMPIRICAL ANALYSIS."Annals Of The University Of Oradea, Economic Science Series22, no. 1: 726-735.Business Source Complete, EBSCOhost(accessed April 12, 2016).