Abstract:
Ethiopia's HDI is below the average for countries in the low HD group and Sub-Saharan
Africa, indicating that our country's HD is minimal and the same too for economic growth.
This study is entitled with the nexus between economic growth and human capital formation
in Ethiopia. The core objective of the study is to examine the nexus between economic growth
and human capital formation using annual secondary time series data from 1980-2020 in
Ethiopia by ARDL and ECM model. Long-run relationship among variables is confirmed
through ARDL bound test and granger causality test reveals bidirectional causality between
human capital formation and economic growth. According to ARDL result the lag of real
gross domestic product, human capital index, carbon emission and trade openness have
significant positive long-run impact on real gross domestic product but income equality has
significant negative impact. But human capital index, carbon emission and trade openness
shows negative significant impact while income equality revealed positive impact on real
gross domestic product in the short run. The empirical results also showed that real gross
domestic product and growth in gross capital formation have significant positive impact,
whereas political freedom and growth in income equality have significant negative impact on
human capital in the long run. Nevertheless the short-run coefficients of real gross domestic
product and growth in gross capital formation are negative but political freedom and
growths in income equality have positive coefficients. Hence the government should increase
expenditure on social and economic infrastructure and create enabling environment that
encourage better investment in human capital by the private sector. In line with this as
carbon emission has positive impact on economic growth, the respective government bodies
needs to encourage industrial development and rapid urbanization, should open the economy
and guarantee freedom to the society.
