Impact of investments in human capital on economic growth: time series analysis

Abstract

Introduction

The Impact of Human Capital on economic growth has always been a matter of discussion in the field of Economics. According to OECD "Human Capital is defined as the knowledge, skills, competencies and other attributes embodied in individuals acquired during their life and used to produce goods, services or ideas in market circumstances". The aggregate Human Capital of an Economy determined by national health and education standards. Over a long time of economic growth leading to improvements in human capital, better educated, healthy, innovative and creative workforce can help increase labor productivity in economic growth. There can be no significant economic growth in any country without adequate Human capital developed. In the Sri Lankan context there is a controversial discussion on the role of human capital in the economic growth process. Sri Lanka has achieved a higher level of education and health indicators relative to the other south Asian countries (HDI Reports 2014 – 2015). But there is a problematic situation regarding contribution of education and health sectors in economic growth of a Sri Lanka relative to the investments on both sectors. So far results of researches which was conducted on impact of human capital in economic growth is directly depend on variables and indicators they used in their research. Therefore it is necessary to examine the impact of Human Capital on economic growth of Sri Lanka consisting broader variables than before. This study examines the impact of human capital on economic growth in Sri Lanka after incorporating both health and education.

Oyedele (2014) has found a relationship between human capital and economic growth using Sargen test and GMM method in Nigeria. This research mainly focused on analysing the effect of human capital on economic growth. It concluded that policy makers should pay attention to both health and education sectors simultaneously. Further they emphasized that the government should increase their financing of both sectors. Conversly, Acroglu and Ada (2014) argued that government expenditure on human capital had no effect on economic growth. Also the results showed increasing quality of education and health sectors improving GDP by directly causing an acceleration of economic growth. Many works of research have been carried out in Sri Lanka on the impact of human capital on economic growth. However there is a limited literature on understanding the human capital contribution on economic growth considering both health and education simultaneously. According to that background this study is conducted to fill this research gap.