An intergrated framework of growth and human capital: application to selected African countries

Abstract

The main thrust of my thesis is to develop an integrated framework of human capital and growth to investigate the role of the two major components of human capital, health and education on growth for a set of selected African countries from 1980-2008. The descriptive analysis and stylized facts on human capital, fiscal dynamics and growth is carried out in Chapter 2. In Chapter 3, we assess the impact of health and education on per capita output. In our model, health and education determine labour effectiveness. In Chapter 4, we explicitly introduce the government budget constraint and the role of government expenditure in the model. This is mainly to capture fiscal constraints and challenges facing developing countries and to assess their possible implications for human capital development and growth. Our analysis and results show that both health and education play a positive role in promoting the effectiveness of labour and in influencing growth. The model features the role of the physical capital stock, which is found to have a significant positive role on health, education and growth. The dynamics of the model reveal that, in the long run, temporary and permanent positive shocks to health and education impact positively on labour effectiveness and growth. Increasing education and health on a permanent basis by 1% leads to on average, a permanent sustained increase in output of 1.2% and 0.8%, respectively. For some countries, the permanent shock to health and education raises output by 1.2% in both cases, indicating presence of increasing returns to scale from health and education on output growth. Similar findings are obtained with the human capital index which constitutes health and education mainly to capture the possible interactions between health and education. With the government budget constraint in the model, the dynamics show that high stocks of the public debt depresses the effect of human capital on output growth through limiting government expenditure resources available for developing human capital. The impact of the public debt on human capital and growth varies in the selected countries depending on the public debtlGDP ratio and on whether the fiscal policy rule is more flexible in reacting to debt and government expenditure; maintains a balanced budget or maintains a zero growth rate in the public debt. Although for all the three fiscal policy rules we find consistency that an increase in the public debt adversely affects human capital and growth and that the impact is much more pronounced when the public debtlGDP ratio goes beyond 40%, our findings show that maintaining a flexible fiscal policy rule and the balanced budget rule gives better results compared to the other fiscal policy rule. There are pronounced lag effects on the impact of education and health on output as well as on how the public debt and government expenditure affects human capital and growth. We conclude that the implications of the public debt on human capital and growth indicate that some developing countries, especially those where the public debt remains high and face fiscal challenges such as poor unsustainable revenue prospects to back government expenditure on health and education cannot solely develop human capital based on the strength of their domestic resources. Also, while we find a significant positive role for education and health on growth in the model without the government budget constraint, incorporating fiscal dynamics reveals that the impact of health and education on growth becomes less pronounced. This underscores the importance of taking into account fiscal dynamics in assessing the impact of health and education on growth to avoid possibly over estimating their growth potential in countries where there are fiscal constraints such as those where the public debt remains high and recurs.