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Human Capital, Regulatory Efficiency And Economic Growth In Ethiopia

IJED, Vol. 14 No. 1, (2020)

This study is based on a time-series data spanning from 1995 to 2019. In this study, we aim to contribute to the existing pool of literatures on the human capital and economic growth nexus in Ethiopia by emphasizing the importance of essential variables related to Regulatory Efficiency (institutional capability). The augmented Solow human-capital-growth model, the Auto Regressive Distributed Lag (ARDL) model and the Error Correction Method (ECM) are used for model specification, estimation, and adjustment of short-run errors respectively. Further tests of residual diagnostics and model stability are employed. In summary, the empirical findings of the study revealed that when an often-omitted variable bias, i.e., a regulatory efficiency is incorporated into the growth model, a long-run and stable relationship among education human capital, gross capital formation and regulatory efficiency with Gross Domestic Product (GDP) is established; structural stability of the model is confirmed. The residual diagnostic tests revealed that the residuals are not-serially correlated and that they are homoscedastic. The study further sheds light on the importance of the assumption that development in human capital and improvement of institutional capability should go hand in hand implying that inconsistent results in previous empirical studies on human capital and growth nexus are contributed in part by an omitted variable bias.

Keywords: Human Capital, Regulatory Efficiency, Institutional Capability, Economic Growth

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