The impact of Human Capital Investment on Nigerias Economic Growth

ABSTRACT

This study examines and explains the relationship between human capital investment and economic growth in the Nigerian economy using secondary data from 1970-2004 and also the study adopts a Cobb-Douglas production function and the Ordinary Least Square method of estimation. It also looks the relationship between real gross domestic product and economic variables such as labour force, total government expenditure on education and real gross capital formation. The empirical analysis carried out shows that labour force, government expenditure on education and real gross capital formation have a positive and significant effect on real gross domestic product with government expenditure surprisingly having the least effect, this can be attributed to misallocation by the government among the levels of education, corruption by government officials, etc. This study therefore, reveals that there exists a positive and significant relationship between human capital investment and economic growth in Nigeria, therefore investment in human capital in Nigeria is a necessity for economic growth in Nigeria. Thus the federal government should increase its revenue allocation to the education sector and also ensure that funds should be given to the agencies in order to enforce strict compliance with the policies, accountability and sanity in education sector.      

CHAPTER 1   INTRODUCTION

1. BACKGROUND OF THE STUDY.

The term Human Capital Investment is a more recent phenomenon in the history of economic development. Economic development programmes in the past (especially from the 1950’s through the 1970’s) and particularly in developing countries have placed a heavy emphasis on, and striven for, rapid economic growth with the conviction that economic growth is synonymous with economic development. In the past, much of the planning in Nigeria was centered on the accumulation of physical capital for rapid growth and development, without recognition of the important role played by human capital in the development process. The stock of natural and physical capital, will Deteriorate and decay if not increased and maintained. 

Thus the role of human capital on economic growth cannot be overemphasized, and has been recognized by development economists to be an invaluable asset and an important pre-requisite. It has been posited by Lucas (1988); Harbinson and Myers (1964) the human capital investment has contributed immensely to economic growth, and be achieved through increased knowledge, skills and capabilities acquired through education and training by all the people in a country.

Since the inception of human capital investment in the history of economic development there has been various works and studies on this paradigm but there seem to be no consensus  in the results of the study. Some scholars have concluded that there is a negative relationship between human capital investment and economic growth while others reported a positive relationship between human capital investment and economic growth.

A study by Ndiyo (2002) reported a negative relationship between human capital investment and economic growth. However studies by Psacharopoulous (1985), Mankiwa, Romer, and Weil (1992), Odusola (1998) reported a positive relationship between human capital investment and economic growth. The East Asian success where rapid growth was facilitated by the availability of highly skilled domestic engineers and workers buttresses the positive relationship.

Considering the commitments of agencies, institutions, organizations all over the world examples include World Bank, United Nations etc, also the commitments of countries including the Nigerian Government on massive investment on human capital, despite this conflicting results obtained from studies, the imperative question goes thus;

“Does Human Capital Investment have a positive or negative relationship with economic growth?”

1.1     OBJECTIVES OF THE STUDY

The main objective of this study is to examine the effects of human capital investment on economic growth in Nigeria. There are also some specific objectives which include:

1. To investigate the significance of education on economic growth in Nigeria
2. To examine the educational expenditure and its impact on the Nigerian economy
3. To provide workable suggestions on how the level of human capital investment in Nigeria can be improved.

1.2   HYPOTHESES OF STUDY

The hypotheses formulated for this study are;

H₀: human capital investment does not affect the economic growth process in Nigeria

H₁: human capital investment affects the economic growth process in Nigeria

H₀: government expenditure does not contribute to economic growth in Nigeria

H₁: government expenditure contributes to economic growth in Nigeria

1.  LITERATURE REVIEW

2.1 CONCEPTUAL FRAME WORK

The concept of human capital formation refers to a conscious and continuous process of acquiring requisite knowledge, education, skills and experiences that are crucial for the rapid economic growth of a country (Harbinson 1973; Salleh 1992). It refers to the abilities and skills of the human resources of a country while its formation refers to the process of acquiring and increasing the number of persons who have the skills, education and experience which are critical for economic and political development of a country (Okojie 1995). Human capital formation transcends mere acquisition of intellectual ability through formal education system. It is dynamic and multi-dimensional, including the family, the educational system, formal and informal institutions, special, professional and traing organizations, enterprise in-house arrangement, and even personal efforts.

Harbinson and Myers defined human capital investment in economic terms as the accumulation of human capital and its effective investment in the development of an economy. According to them human resources can be developed in three ways.

1. By formal education, beginning from first level to secondary education and then to higher forms of education as in colleges and universities.
2. Through systematic or informal training programmes in employing institutions, in adult education programme and through membership in various political, social, religious, and cultural groups.
3. Through self improvement efforts by reading or by learning from others in informal contact.

Schultz (1961) also identified five ways of developing human resources namely;

1. Broadly conceived investment in health facilities and services to include all expenditures that affect the life expectancy, strength and stamina and the vigor and vitality of the people.
2. On-the –job training, including old-type apprenticeships organized by firms
3. Formally organized education at the elementary, secondary and higher levels.
4. Study programme for adults that are not organized by firms including extension programmers notably in agriculture.
5. Migration of individuals and families to adjust to changing job opportunities.

From the above definitions, human capital investment can be looked at from various perspectives such as social, educational healthcare. This study will review the educational and healthcare aspect with emphasis on education.

•      HUMAN CAPITAL INVESTMENT AND ECONOMIC GROWTH

This section of study shall concentrate on examining the relationship between human capital investment and economic growth i.e. it shall focus on examining relevant literatures on the effect of human capital investment on economic growth in Nigeria.

The conclusion about the effect of human capital investment on economic growth has revealed different results, while some authors concluded a negative relationship between human capital investment and economic growth; others concluded that there is a positive relationship between them.

In the study of human capital, there are a number of proxies that can be employed and they include school enrolment, enhancement of social security, student-teacher ratio, average years of schooling are currently the most commonly employed measure, but it is problematic for some reasons such as first average years of schooling does not raise human capital by an equal amount regardless of whether a person is enrolled in primary, secondary or tertiary schooling level, also it does not take into account quality changes within the educational system, drop-out and repetition. (Psacharopoulos and Wood hall 1986), Loening (2002)

For the purpose of clarification, the positive and negative effects of human capital investment on economic growth shall be examined separately, beginning with the positive effects.

The positive effects of human capital investment (education) has been demonstrated diversely. Odusola (1998) posits that human capital investment is strongly and positively related to growth. Through the relationship is weak, the study indicates that there is a feed back mechanism between human capital investment and the growth of per capita income.

Adamu (2002) undertakes an empirical investigation of the impact of human capital formation on the economic growth of Nigeria using time series data from 1970-2000. The study proxied investment in human capital by recurrent and capital investment in education. The result showed that human capital investment facilitates economic growth.

The author therefore, recommended that government should encourage investment in people by increasing its spending on social and economic infrastructure and also ensure macroeconomic stability that will provide the required enabling environment for human capital investment. The draw back of this study is that nominal recurrent and capital expenditure were used as a proxy for investment in human capital which seems inappropriate for a country like Nigeria that is faced with persistent inflation.

Also, Chete and Adeoye (2002) examined human capital investment on the economy and established a positive relationship between them. The study was done using regression analysis to establish relationship growth rate of real gross domestic product and investment in GDP ratio, employment rate and human capital proxied by total expenditure on education and health. The authors state that the government appears persuaded about the direct  association between investment in human capital and economic growth but real capital expenditures on education and health sometimes slide or are  deliberately cut, thus it is important for government to continue to channel more financial resources into the educational sector.

Barro (1991) did a study of 98 countries between 1960 and 1985, and used school enrolment rates as a proxy for human capital. His finding is that the growth of real per capita GDP is positively related to initial human capital proxied by 1960 school enrolment rates.

Using the augmented solow growth model with the product secondary school enrolment ratio and the proportion of  the labour force secondary school age as a measure of  flow investment in human capital,Mankiw,Romer and Weil (1992) show that investment in human capital substantially and significantly and influence per capita income growth. Even when primary school enrolment was used as suggested by Romar (1995) and Klenow and Rodriguez Clare (1997), the result still show that human capital term  is highly significant. Using varied forms of human capital investment such as school enrolment, human development index and economy liberty index, Grammy and Assane (1996) have found that human capital formation positively and significantly contributed to economic growth.

In Uwatt (2002),human resource development proxied by enrolment in educational institution was found not only to contribute positively to economic growth in Nigeria but its was found  to be strong and statistically significant. The study went further to examine the relative importance of each level of education (primary, secondary and tertiary education) in terms of their contribution to economy   growth but, they differ in their importance to economic growth. The obvious drawback of this study is the use of enrolment to proxy human capital investment. Its use has been criticized on the ground that it is only a quantitative indicator. In other words it tells us nothing about the quality of human capital investment.

As Chete and Adeoye (2002) observed “monumental growth in enrolment figure may not necessarily guarantee economic growth. The enrolments in school do not say anything about the dropout and repetition. In a study by Psacharopoulos and Wood hall (1986) it was discovered that in many developing countries less than half of the pupils enrolled in the first grade; the remainder will dropout without attaining permanent literacy and many of those who complete primary repeat one or more grades.

Hicks (1980), Wheeler (1980), Otani and Villanueva (1995), World Bank (1995), all conclude that the investment in human capital positively affects the rate of growth of the economy.

Some authors have also concluded that investment in human capital has a negative relationship. Studies in category include Benhabib and Spiegel (1994), Islam (1995), Castelli and others (1996), Hoeffler (1999), Pritchett (2001) etc.

Benhabib and Spiegel (1994) use a standard growth accounting framework that includes initial per capita income and estimates of  years of  schooling and found a negative coefficient on growth of years of schooling. This negative effect of educational growth was found by Spiegel (1994) to be robust to thwe inclusion of  a wide variety of ancillary variables and to the inclusion of samples.

Also Ndiyo (2002), using a budget allocation to education as a proxy for human capital investment found a negative but significant relationship between human capital investment and economic growth. In the light of various studies it can be easily concluded that human capital investment focuses on economic growth alone, rather it should improve productivity, reduce income inequality and poverty, enhance employability, and emancipate from political and social oppression, that is, the economic growth must to be balanced. It should facilitate the process of poverty alleviation by ensuring the distribution and social equity of a country (Oladeji and Adebayo 1996).