2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

ROLE OF HUMAN CAPITAL IN ECONOMIC DEVELOPMENT: AN

EMPIRICAL STUDY OF NIGERIAN CASE

By

Risikat Oladoyin S. Dauda, Ph.D

Department of Economics
University of Lagos
Akoka, Lagos
E-mail: [email protected]
[email protected]

ABSTRACT

Although several theories of endogenous growth point towards a positive effect of human
capital on growth, empirical evidence on this issue has been mixed. Despite various
efforts of the successive Nigerian governments, virtually all indices of human
development especially those of health and education are embarrassingly low. These
indices include infant and maternal mortality rates, life expectancy at birth, population
per physician, adult literacy rate, gross primary and secondary enrolment ratio. In the
same vein, the level of resource commitments to health and education compare very
unfavourably with the situation in other developing countries. Using the human capital
model of endogenous growth developed by Mankiw, Romer and Weil (1992), this paper
examines empirically the role of human capital in Nigeria’s economic development. The
paper employed a variety of analytical tools, including unit root tests, cointegration tests
and error correction mechanism (ECM). Empirical results indicate that there is, indeed a
long-run relationship among labour force, physical capital investment proxied by real
gross domestic capital formation, human capital formation, proxied by enrollment in
educational institutions and economic growth in Nigeria. Findings show that there is a
feedback mechanism between human capital formation and economic growth in Nigeria.
Thus, the policy implication of the findings is that government should place a high
priority on human capital development. Efforts should be intensified to increase
investment in human capital to achieve the growth which would engender economic
development. Most importantly, education should be given prominence in Nigeria’s
developmental efforts. This would propel the economy to higher levels of productivity.

June 28-29, 2010 1

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

1. INTRODUCTION

The role of human capital in economic growth cannot be overemphasized. The

development of human capital has been recognized by economists to be a key

prerequisite for a country’s socio-economic and political transformation. Among the

generally agreed causal factors responsible for the impressive performance of the

economy of most of the developed and the newly industrializing countries is an

impressive commitment to human capital formation (Adedeji and Bamidele, 2003; World

Bank, 1995, Barro, 1991). This has been largely achieved through increased knowledge,

skills and capabilities acquired through education and training by all the people of these

countries.

It has been stressed that the differences in the level of socio-economic

development across nations is attributed not so much to natural resources and

endowments and the stock of physical capital but to the quality and quantity of human

resources. According to Oladeji and Adebayo (1996), human resources are a critical

variable in the growth process and worthy of development. They are not only means but,

more importantly, the ends that must be served to achieve economic progress. This is

underscored by Harbinson (1973) who opined that “human resources constitute the

ultimate basis for the wealth of nations. Capital and natural resources are passive factors

of production; human beings are the active agents who accumulate capital, exploit natural

resources, build social, economic, and political organizations, and carry forward national

development. Clearly a country which is unable to develop the skills and knowledge of

its people and to utilize them effectively in the national economy will be unable to

develop anything else”.

June 28-29, 2010 2

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

Nigeria’s overarching objective since independence in 1960 has been to achieve

stability, material prosperity, peace and social progress. However, this has been

hampered as a result of internal problems. These include inadequate human development,

primitive agricultural practices, weak infrastructure, uninspiring growth of the

manufacturing sector, a poor policy and regulatory environment and mis-management

and misuse of resources. In order to ensure the economy delivers on its potentials, the

country experimented with two development philosophies-a private sector-led growth in

which the private sector served as the “engine house” of the economy and a public sector

– driven growth in which the government assumed the “commanding heights” of the

economy. The initial low level of private sector development, however, led to public

sector dominance of the economy, encouraged by growth in the oil sector (UNDP, 2009).

It is noteworthy that since the advent of civilian rule in 1999, growth performance

has improved significantly. The last seven years witnessed an average growth rate of

about 6 percent (UNDP, 2009:5; CBN, 2008). However, economic growth has not

resulted in appreciable decline in unemployment and poverty prevalence. Human

development has remained unimpressive as shown by the indicators in Table 1.

Over the years, successive Nigerian governments recognized the importance of

human capital formation in the development process and have embarked on various

programmes and projects which led to the establishment of educational institutions and

health centres throughout the country. However, in the late 1970s and early 1980s,

federal government spending grew substantially resulting in fiscal crisis, inflation, and

heavy borrowings. Subsequently, through the austerity measures adopted in 1982 and

structural adjustment programme introduced in 1986, the country attempted to bring

June 28-29, 2010 3

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

down fiscal deficits as part of its stabilization and adjustment programmes, often by

reducing public spending on across-the board basis. These reductions resulted in

unprecedented economic and social costs as human resources development was neglected

with adverse long-term development consequences (Oyinlola and Adam, 2003). Thus, the

ultimate goal of economic development which underscored the need to improve the well-

being of people was overlooked.

Table 1: Nigeria’s Human Development Summary Statistics by Zones, 2008

Zones Human Human Gender

Gender Inequality
Development Poverty Development
Empower Measure
Index (HDI Index Measure
ment (INQ)
Value) (HPI) (GDM)
Measure
(GEM)
North Central 0.490 34.65 0.478 0.244 0.49
North West 0.420 44.15 0.376 0.117 0.44
North East 0.322 48.90 0.250 0.118 0.42
South West 0.523 21.50 0.507 0.285 0.48
South East 0.471 26.07 0.455 0.315 0.38
South South 0.573 26.61 0.575 0.251 0.41
Source: UNDP (2009:5) Summary: Human Development Report Nigeria 2008-2009,
UNDP, Abuja

In more recent times, renewed attention was paid to the role of human capital formation

in the country’s development process and this has prompted the federal government to

declare in its 1999-2003 economic policy programme that “the economy exists for and

belongs to the people, and at all times the general well-being of all the people shall be the

overriding objectives of the government and the proper measure of performance” (FGN,

1999). This policy statement of the government is further reiterated in the National

Economic Empowerment and Development Strategy (NEEDS). The provision of high-

June 28-29, 2010 4

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

quality education and health care to all the country’s citizens is considered a key element

of public policy by all levels of government.

Against the above background, the aim of this study is to examine the impact of

human capital formation on economic growth in Nigeria between 1977 and 2006 and on

the basis of the findings, recommend policies and measures for improving human capital

formation in the country. Following the introduction, section two presents a review of

relevant literature while section three outlines the analytical framework and the model.

Section four discusses the empirical results and section five concludes the paper.

2. Literature review

Human capital has been defined in various ways. For the purpose of this study, the

general definition given by the United Nations Economic Commission for Africa (1990)

is considered. The concept of human capital refers to the knowledge, skills, attitudes,

physical and managerial effort required to manipulate capital, technology, and land

among other things, to produce goods and services for human consumption (UNECA,

1990). Human capital formation, on the other hand, refers to the process of acquiring and

increasing the number of persons who have the skills, education and experience that are

critical for the sustainable growth and development of a country. The economic benefits

of human capital formation arise from making people more productive by improving their

nutrition, health, education and other social indices through adequate and proper

investments. According to Okojie (1995) human capital formation is associated with

investment in man and his development as a creative and productive person. It is a

June 28-29, 2010 5

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

continuum, a continuing process from childhood to old age, and a must for any society or

enterprise that desires to survive under the complex challenges of a dynamic world.

Schultz (1961) in his work identified strategies for human resource development.

These include the following: (i) investment in health facilities and services, broadly

conceived to include all expenditure that affect the life expectancy, strength and stamina,

and the vigour and vitality of the people; (ii) on-the-job training, including old-type

apprenticeships organization by firms; (iii) formally organized education at the

elementary, secondary and higher levels; (iv) study programme for adults that are not

organized by firms, including extension programmes notably in agriculture; (v) migration

of individuals and families to adjust to changing job opportunities development. In line

with this, Meier (1970) opines that human resource development concerns the two-fold

objective of building skills and providing productive employment for non-utilized or

underutilized manpower. Both stem from investment in man in the form of education and

training which are known to be institutional mechanisms for enhancing people’s

knowledge, skills and capabilities.

Several studies have attempted to investigate the relationship between human

capital and economic growth and these studies have shown mixed results. In his study of

98 countries between 1960 and 1985, Barro (1991) using school enrolment rates as

proxies for human capital found that the growth rate of real per capita is positively related

to initial human capital proxied by 1960 school enrolment rates. Mankiw, Romer and

Weil (1992), augmenting the Solow’s growth model, empirically show that the effects of

saving or investment and population growth rates are biased upward whenever human

capital formation is excluded. Their model explains nearly 80 percent of the cross-

June 28-29, 2010 6

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

country variation in per capita income, which is about 30 percent larger than when human

capital is excluded. For the categories of countries, (low-income, intermediate and OECD

countries), investment in human capital substantially influenced per capita income at 1

percent level of significance. Similarly, Burnett et al (1995) show that massive

investment in both primary and lower secondary school significantly explained the

development ‘miracle’ experienced in East Asia.

Grammy and Assane (1996), using varied forms of human capital investment,

such as school enrolment, human development and economic liberty index evidently

pointed out that human capital formation propels growth in per capita income. Its positive

contribution to growth was statistically significant at 1 percent. Besides, the inclusion of

the variable reduces the bias often associated with growth models that exclude human

capital investment and, hence, the explanatory power of the model.

In contrast, Benhabib and Spiegel (1994) employed a standard growth accounting

framework to study the contribution of human capital to economic growth, they found a

negative relationship between initial per capita income and growth. Similarly, Pritchett

(2001) found a negative impact of education on growth.

There are large numbers of empirical studies that confirm the strong association

between health and economic growth. For instance, Blooms and Sachs (1998), as cited in

Hamoudi and Sachs (1999), provided empirical evidence on the relationship between

health variables and economic growth rates and found that health variables play a

significant role in determining economic growth rates. They showed this by investigating

cross-country data between 1965 and 1990, using a basic growth model, and they found

that an increase of life expectancy by one percent accounted for an acceleration of GDP

June 28-29, 2010 7

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

per capita growth by over 3% per annum. In addition, health and demographic variables

explained over half of the differences in growth rates between Africa and the rest of the

world over that same period.

There are also various studies that address the important issue of gender

dimension in human capital investment. For instance, Lagerlof (1999) examines the

impact of gender inequality in education on fertility and economic growth. Using an

overlapping generation framework, the paper argues that initial gender inequality in

education can lead to a self perpetuating equilibrium of continued gender inequality, with

the consequences of high fertility and low economic growth. In the same vein, Schultz

(1994) also argues that reducing gender inequality through access to education and the

labour market will help reduce poverty, thereby increasing the rate of economic growth..

Ramirez, Ranis, & Stewart (1997) explored two way linkages between economic

growth and human development empirically with the help of cross-country statistics. The

study argues that public expenditures on health and education represent especially

important links in determining the strength of the relationship between economic growth

and human development. Two chains namely, economic growth to human development

and from human development to economic growth can generate self-reinforcing, vicious

cycles of development, as well as identifying lop-sided performers. The study finds that

over time lop-sided development rarely carry on: countries initially in favour of economic

growth lapse into the vicious category. Hence, even though both human development and

economic growth should be encouraged together, human development should be given

first priority.

June 28-29, 2010 8

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

Mustafa, Abbas, & Saeed (2005) emphasized the role of human resource

development and vocational training for economic growth in Pakistan. The study

reviewed and analyzed the status of vocational training, related policies and practices and

their impact on development of human resource. The effect of the rate and variability of

increase in institutions, enrolment and teachers on output growth variability was also

explored. As the fluctuations in rate and variability of vocational indicators have serious

implications for the output growth variability hence, the output growth variability was

regressed on the rate and variability of the institutions, enrolment, and teachers, to find

out the growth and the variability impact of the vocational indicators on the output

growth variability. The analysis of the impact of vocational indicators indicates that the

long term planning is required to achieve the benefits of current policies. There is

positive and significant relationship between the growth of institutions and output growth

variability moreover; enrolment and teachers also play a significant role in determining

the output growth variability. On the whole analysis shows that both the rate and

variability of vocational indicators have positive and mostly significant impact on the

output growth variability in the long run.

Abbas (2001) analyzed the impacts of human capital on economics growth for

Pakistan and Sri lanka. The results of empirical analysis show that primary schooling

enrolment rates has negative while secondary and higher schooling enrolment rates has

positive and significant impact on economic growth for both countries in the sample. The

study has also combined the schooling enrolment rates at different levels of education

with employment to generate effective labour input that performed better as compared to

June 28-29, 2010 9

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

simple schooling enrolment rates and it is again concluded that there are important

growth effects associated with human capital.

In Nigeria, several studies have emerged in an attempt to provide quantitative

evidence to the growth-human capital nexus. Akangbou (1983) and Mbanefoh (1980)

determine the social and private returns to the different levels of education-primary,

secondary and university, using cross-sectional data. On the basis of the positive rate of

returns often computed, inference is made about the positive role of human capital on

economic growth. Odusola (1998) using ordinary least square technique found that

human capital, proxied by real capital and recurrent expenditure on education, is

positively related to growth, although the relationship is weak.

The Nigerian Economic Society held a conference on human resource

development in Africa in Nigeria in 2002 and several interesting papers were presented.

Some of the papers showed a positive and significant contribution of human capital to

economic growth (Adamu, 2003; Uwatt, 2003; Chete and Adeoye, 2003).

Adamu (2003) undertook an empirical investigation to determine the impact of

human capital formation on economic growth in Nigeria between 1970 and 2000, using

cointegration and error-correction mechanisms. The results indicate that investment in

human capital in the form of education and training can lead to economic growth because

of its impact on labour productivity.

Chete and Adeoye (2003) explored the association between human capital

investment and economic growth in Nigeria. A number of methodological approaches

were employed to examine this link. Specifically, the Granger causality tests were

inconclusive on the direction of causality. The variance decomposition analysis shows

June 28-29, 2010 10

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

that “own shocks” constitute the predominant source of variation in employment

growth’s forecast errors and income growth’s forecast errors, and that innovations of

employment growth can be better predictors of income growth. The impulse response

analysis reveals that there are considerable oscillations in the response patterns of income

and employment to unanticipated shocks in each other. The paper observed a mismatch

between the manpower needs of the country and the skills turned out by the educational

system.

Uwatt (2003) provided empirical evidence on the role of human resource

development proxied by enrolment in educational institutions on economic growth in

Nigeria, using the augmented Solow growth model and relying on cointegration and

error-correction methodology. The results showed that human resource development does

not only contribute positively to economic growth in Nigeria, but its impact is strong and

statistically significant. This occurs despite the decline in the quality of education at all

levels since the mid 1980s. Contrary to the conventional wisdom, Ayara’s (2003) study

observed that the growth of educational capital shows a significant negative effect on

economic growth in Nigeria. This is in line with the studies by Pritchett (2001), Islam

(1995) and Hoeffler (1999). Could this be interpreted to mean that educational

investment is harmful to growth in Nigeria? Due caution must be exercised in

interpreting the result. However, several factors might be responsible for this. Some

possible explanations offered by the Pritchett (2001) and Ayara (2003) include the

following; (i) existence of brain drain; (ii) the newly created educational capital might

have gone into privacy that is, privately remunerative but socially unproductive activities;

(iii) incessant strike actions by the academic and non-academic staff of Nigerian

June 28-29, 2010 11

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

universities; (iv) failure of the educational system to provide qualified manpower that

would enhance productivity growth; (v) there may be slow growth in the demand for

educated labour, so that the supply of educational capital has outstripped demand and

returns to schooling have declined.

3. Analytical Framework and the Model.

An endogenous model of economic growth appears to be the most suitable for the study.

The model suggests that endogenous factors such as government policies, political

stability, market distortions, human capital etc., can significantly affect economic growth.

It is a widely used growth model to provide a systemic investigation of the human

capital-economic growth nexus. For example, Uwatt (2003) and Adamu (2003) used it to

assess the role of human capital in the Nigerian economy. This study is different from

previous studies in terms of the analytical tools used. Also, the data used is extended to

2006.

The framework for this study is adapted from Adamu (2003). It assumes a

standard neoclassical production function which begins from a premise that changes in

quantities of factors of production account for growth. The neo-classical model is based

on the Cobb-Douglas function and is given as:

Y= F (A, K, L) ----------------------------------------------------------------------- (1)

Where Y, K, L are aggregate real output, capital and labour respectively, and A denotes

technical progress or total factor productivity.

When we differentiate equation (1) with respect to time, divide by Y and rearrange the

terms, it gives equation (2) as:

June 28-29, 2010 12

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

 ∆Y   ∆A   ∆K  K   ∆L  L 
  =   + FK   + FL   - - - - - - - - - - - - - - - - - - - (2)
Y   A  Y  K   Y  L 

Where;

Y/K = Rate of growth of output;

K/K = Rate of growth of capital;

L/L = Rate of growth of labour force.

FK FL = Social marginal product of capital and labour respectively;

∆ A/A = Hicks neutral rate of change of technological progress.

Modern economic growth depends on the accumulation of physical capital and an

increase in labour force with improved technological embodiment without which labour

cannot be effective. Human capital is a factor influencing labour productivity because it

facilitates the absorption of new technology, increases the rate of innovativeness and

promotes efficient management (Adamu, 2000). Consequently, for high labour

productivity, an integral part of technological progress is investment in human capital and

thus is termed endogenous factor because accumulation of physical capital is enhanced

by the knowledge, skills, attitudes and health status of the people who partake in such

exercise. Thus, there is a strong and positive relationship between investment in human

capital and output growth.

In this regard, several studies have attempted to integrate exogenous forces with

endogenous factors in explaining economic growth across countries by using augmented

Solow neoclassical production function. These studies include but not limited to the

following; Romer (1990), Mankiw, Romer and Weil (1992), Gemmell (1996), Grammy

and Assane (1996) and Chete and Adeoye (2003). Generally, the impact of human capital

June 28-29, 2010 13

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

on economic growth is incorporated according to the Mankiw, Romer and Weil (1992)

framework and is given below as:

α -β
Y(t) = K(t) α H(t) β (A (t) L(t ) )1- -------------------------------------------------(3)

Where;

Y is output; K = Physical capital and H = the Human Capital Stock; L=Labour force; A is

level of technology and α ,β < 1, implying decreasing returns to capital. By implication,

there is a strong and positive relationship between investment in human capital and

output growth.

Based on the literature reviewed earlier, the following model is specified to

evaluate the impact of human capital formation on economic growth in Nigeria.

RGDP = (GCF, LBF, PRI, SEC, TER)………………………………………… (4)

Where

RGDP = Real gross domestic product as a proxy for economic growth.

GCF = Real gross capital formation

LBF = Labour force.

PRI = Primary education enrollment

SEC = Secondary education enrollment

TER = Tertiary institution enrollment

U = White noise

For estimation purposes, we can re-specify equation (4) in a log-linear functional form:

This will give:

InRGDP =α0+α1InGCF+α2InLBF+α3InPRI+α4InSEC+α5InTER+U……………… (5)

The a priori expectations are as follows:

June 28-29, 2010 14

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

α1, α2, α3, α4, α5, > 0

The equation was estimated using a variety of analytical tools, including unit root tests,

co-integration tests and error correction mechanism (ECM). The results are discussed

below. The data used for the study covers the period 1977 and 2006. The study employed

secondary data which are derived from various issues of CBN Annual Report and

Statement of Accounts, CBN Statistical Bulletin and World Bank African Development

Indicators.

4. Empirical Results

4.1. Unit Roots Test

It has been established in the literature that most time series variables are not stationary

and using non-stationary variables in the model might lead to spurious regression which

cannot be used for precise prediction. Hence, our first step is to examine the

characteristics of the data in order to determine whether the variables have unit roots i.e,

whether it is stationary and the order of integration. For this purpose, the Augmented

Dickey-Fuller test is used. A variable is stationary if the absolute ADF value is higher

than any of the absolute Mackinnon values. The result of the stationarity test with

intercept term is presented in Table 2. The results showed clearly that all the variables are

non-stationary at level. This suggests the need to difference the series to obtain

stationarity. At first difference, however, all the variables are stationary and are

integrated of order 1. Since all the variables are integrated of the same order,

cointegration analysis is justified.

June 28-29, 2010 15

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

4.2. Cointegration test results

Co-integration test is carried out in order to determine the long-run relationship between

the dependent and independent variables when one or all of the variables is/are non-

stationary at level which means they have stochastic trend. Essentially, it is used to check

if the independent variables can predict the dependent variable both now (short-run) or in

the future (long-run). The long –run relationship among the variables were examined

using Johansen (1991) cointegration framework. The result is presented in table 3. It

revealed that there is cointegration among the variables. This is because the likelihood

ratio value of 116.0695 is greater than the critical value of 103.18 at 1 percent level of

significance. We reject the null hypothesis of none**of the hypothesized number of

cointegrating equations. In the same vein, the likelihood ratio value of 71.55996 is greater

than the critical value of 68.52 at 5 percent level of significance. We reject the null

hypothesis of at most 1* of the hypothesized number of cointegrating equations.

TABLE 2: RESULTS OF STATIONARITY (ADF UNIT ROOT) TEST

VARIABLES ADF TEST STATISTICS CRITICAL VALUES (5%) ORDER

OF
INTEGRATION

LEVEL 1ST LEVEL 1ST

DIFFERENCE DIFFERENCE
LNRGDP -0.6319 -5.0659 -2.9705 -2.9750 1(1)
LNGCF -0.2715 -3.3616 2.9705 -2.9750 1(1)
LNLBF -1.8501 -4.4125 -2.9705 -2.9750 1(1)
LNPRI -0.7957 -3.6520 -2.9705 -2.9750 1(1)
LNSEC -2.4085 -4.5318 -2.9705 -2.9750 I(1)
LNTER -0.7947 -3.3491 2.9705 -2.9750 1(1)
Source: Extracted From the Computer output.

June 28-29, 2010 16

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

Accordingly, the likelihood ratio (LR) test indicates 2 cointegrating equations at 1and 5

percent level of significance respectively. For the remaining number of hypothesized

cointegrating equations (at most 2, 3,4 and 5), we do not reject the null hypothesis as

their likelihood ratio values are less than the critical values at 5 percent level of

significance. The main conclusion is that there is the existence of long-run relationships

amongst the variables. The variables may wander away from themselves, but in the long-

run, there is the existence of relationship amongst them.

TABLE 3: JOHANSEN COINTEGRATION TEST

Eigenvalue Likelihood 5 percent 1percent Hypothesized
Ratio Critical value Critical value No of CE(s)
0.795998 116.0695 94.15 103.18 None **
0.629418 71.55996 68.52 76.07 At most 1*
0.549834 43.76491 47.21 54.46 At most2
0.360901 21.41703 29.68 35.65 At most 3
0.211890 8.881563 15.41 20.04 At most 4
0.076035 2.214281 3.76 6.65 At most 5
*(**) denotes rejection of the hypothesis at 5% (1%) significance level.
L.R. test indicates 2 cointegrating equations(s) at 5% significance level.
Source: Author’s Computations

4.3 EMPIRICAL RESULTS OF THE DYNAMIC MODEL (ECM)

Although long-run equilibrium relationship may occur among variables in the regression

model, short-run equilibrium may not occur. Error correction mechanism is therefore

used to correct or eliminate the discrepancy that occurs in the short-run. The coefficient

of error-correction variable gives the percentage of the discrepancy between the variables

June 28-29, 2010 17

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

that can be eliminated in the next time period. The coefficients of the explanatory

variables in the error correction model measure the short-run relationship. When

conducting error correction technique, an overparameterized model is usually expressed

to deal with the problem of misspecification in the model. This is followed by the

parsimonious model, which is derived after some stepwise elimination of relatively

insignificant parameters in the overparameterized model. The results from the

overparameterized model are presented in Table 4. The parsimonious model is obtained

from a stepwise elimination of insignificant dynamic variables until parsimony is

obtained; the result of this process is given in table 5. From Table 5, it is revealed that a

physical capital formation proxied by real gross fixed capital formation has a positive and

significant relationship with real gross domestic product. Its coefficient is statistically

different from zero at 5 percent level. The empirical results show that the coefficient of

labour force (LBF) is positive in compliance with the theoretical expectation and also

statistically significant at 5 percent level. The variable denoting human capital

components i.e. school enrolments at the primary, secondary, tertiary levels comply with

the a priori expectations. That is, they have positive coefficients. All the human capital

variables except, primary school enrolment are significant. This is shocking but not

unexpected. This result is supported by the work of Abbas (2001) who found that primary

education made no significant impact on the economic growth of Pakistan and Sri Lanka.

The reasons for the positive but not significant effect of primary education on economic

growth performance in Nigeria are not far-fetched. This indicates that unskilled people,

i.e people with low level of education has little or no capacity to increase productivity.

These people do not contribute significantly to economic growth because many engage in

June 28-29, 2010 18

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

jobs that are often not accounted for in the national income. Besides, majority of these

people dwell in the rural areas and opportunities given to them by way of loans by the

government and financial institutions are often abused. The loans are collected and

diverted to unprofitable use e.g. marrying more wives. By so doing, these unskilled

people cannot contribute significantly to growth. To address this problem, policy

measures must be put in place to ensure that those with primary education should also be

encouraged to acquire secondary education. The results, however confirmed the

importance of human capital formation in Nigeria’s development process. The

implication is that policy measures that are targeted at improving the educational human

capital can effectively enhance national income. It is obvious from the coefficient of

multiple determination (R2) that the model has a good fit as the independent variables

were found to jointly explain 82 percent of the movement in the dependent variables.

Gross fixed capital formations, labour force, school enrolment at the secondary and

tertiary levels are the major determinants of real gross domestic product in Nigeria. The

fitness of the model is confirmed by the F-statistic which is significant at 1 percent. The

error correction variable (ECM), which is minus 2.2546, was highly significant validating

the error correction model specification. This shows that a feedback of -2.25 from the

previous year’s disequilibrium from the long-run elasticity of the identified variables can

determined economic growth. The strong significance of the ECM connotes the existence

of a long-run equilibrium relationship between real gross domestic product and the

factors affecting it.

June 28-29, 2010 19

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

Table 4: Modelling the impact of human capital on economic growth in Nigeria (A

Dynamic Error Correction Model) – Overparameterized model
Summary of the Result of the Estimation Equations
Dependent variable: log of Real Gross Domestic Product (LNRGDP2)
INDEPEDENT COEFFICIENT STD. ERROR T-STATISTIC PROB.
VARIABLES
D(LNGCF, 2) 0.870469 0.516510 1.685292 0.1262
D(LNGCF(-1),2) 0.436771 0.413334 1.056701 0.3182
D(LNGCF(-2),2) 0.250700 0.428129 0.585571 0.5726
D(LNLBF, 2) 0.090755 0.079974 1.134801 0.2858
D(LNLBF(-1),2) -0.016950 0.081265 -0.208574 0.8394
D(LNLBF(-2),2) 0.029262 0.076568 0.382175 0.7112
D(LNTER, 2) 0.508742 0.310977 1.635946 0.1363
D(LNTER(-1),2) 0.091558 0.403566 0.226871 0.8256
D(LNTER(-2),2) -0.016605 0.350022 -0.047440 0.9632
D(LNSEC, 2) 1.257007 1.039329 1.209441 0.2573
D(LNSEC(-1),2) 0.441689 1.057491 0.417676 0.6860
D(LNSEC(-2),2) -0.022610 0.836841 -0.027018 0.9790
D(LNPRI, 2) 1.173409 0.943805 1.243275 0.2452
D(LNPRI(-1),2) 0.325717 1.101884 0.295598 0.7742
D(LNPRI(-2),2) -0.439730 1.076728 -0.408394 0.6925
ECM (-1) -2.503907 0.525930 -4.760917 0.0010
C -0.051907 0.087026 -0.596456 0.5656
R-Squared = 0.837416
Adjusted R-Squared = 0.548378
F-Statistic = 2.897248
Prob (F- Statistic) = 0.054770
Durbin – Watson Statistic = 1.543159

Table 5: Modelling the impact of human capital on economic growth in Nigeria (A

Dynamic Error Correction Model) – Parsimonious Model
Summary of the Result of the Estimation Equations
Dependent variable: log of Real Gross Domestic Product (LNRGDP2)
INDEPEDENT COEFFICIENT STD. ERROR T-STATISTIC PROB.

VARIABLES
D(LNGCF, 2) 0.766625 0.224611 3.413119 0.0028
D(LNLBF, 2) 0.138746 0.040470 3.428414 0.0027
D(LNTER, 2) 0.482038 0.193250 2.494367 0.0215
D(LNSEC, 2) 1.046394 0.468385 2.234046 0.0371
D(LNPRI, 2) 0.827553 0.504533 1.640234 0.1166
ECM (-1) -2.254602 0.278936 -8.082880 0.0000
C -0.027514 0.066925 -0.411125 0.6854
R-Squared = 0.82
Adjusted R-Squared = 0.76

June 28-29, 2010 20

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

F-Statistic = 14.72
Prob (F- Statistic) = 0.00
Durbin – Watson Statistic = 2.04
* (**) Significant at 1% (5%) respectively

Sources: Extract from Computer Output.

5 Summary, Conclusion and Recommendations

The paper has attempted to examine the relationship between human capital formation

and economic growth in Nigeria. The human capital model of endogenous growth

developed by Mankiw, Romer and Weil (1992) is used for the study. The paper employed

a variety of analytical tools, including unit root tests, cointegration tests and error

correction mechanism (ECM). Empirical results indicate that there is, indeed a long-run

relationship among labour force, physical capital investment proxied real gross domestic

capital formation, human capital formation and economic growth in Nigeria All the

variables appear with the expected positive signs. The variable denoting human capital

components i.e. school enrolments at the primary, secondary, tertiary levels comply with

the a priori expectations. That is, they have positive coefficients. All the human capital

variables except, primary school enrolment are significant in economic growth and

development. It is evident that there is a feedback mechanism between human capital

investment (at least on secondary and tertiary education) and the real gross domestic

product in Nigeria. Thus, the policy implication of the findings is that government should

place a high priority on human capital development. Efforts should be intensified to

increase investment in human capital to achieve the growth which would engender

economic development. Most importantly, education should be given prominence in

Nigeria’s developmental efforts. However, concentration should be on basic education

June 28-29, 2010 21

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

(comprising both primary and secondary education) and higher education. This would

propel the economy to higher levels of productivity. There is also the need for the

government to create enabling environment which would encourage heavy investment in

infrastructural foundation that can enhance labour productivity and induce growth.

REFERENCES

Abbas, Q. (2001) Endogenous Growth and Human Capital: A Comparative Study of

Pakistan and Sri Lanka. The Pakistan Development Review, 40 (4), 987-1007.

Adamu P.A. (2003) The Impact of Human Capital Formation on Economic Development
in Nigeria: An Error Correction Approach In.: Human Resource Development in
Africa. Selected Papers for 2002 Annual Conference, Nigerian Economic Society,
Ibadan, pp 53-78.

Adedeji, S.O. and R.O. Bamidele (2003) Economic Impact of Tertiary Education on
Human Capital Development in Nigeria In.: Human Resource Development in
Africa. Selected Papers for 2002 Annual Conference, Nigerian Economic Society,
Ibadan, pp 499-522

Akangbou, S.D. (1983) Cost Benefit Analysis of Educational Investment in Bendel State
of Nigeria. Journal of Nigerian Educational Research Association 3(2)
June, pp 29-38

Ayara, N.N.(2003) The Paradox of Education and Economic Growth in Nigeria: An

Empirical Evidence, In.: Human Resource Development in Africa. Selected
Papers for 2002 Annual Conference, Nigerian Economic Society, Ibadan,
pp 53-78

Barro, R (1991), Economic growth in a cross – section of countries. Quarterly Journal

of

June 28-29, 2010 22

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

Economics 10611), pp. 407-43.

Barro, R. and Jong – Wa Lee (1991) International Comparisons of the Educational

Attainment Journal of monetary Economics, pp 363 -394

Benhabib, J. and M. Spiegel (1994) Role of Human Capital in Economic Development:

Evidence from Aggregate Cross-Country Data. Journal of Monetary Economics
34, pp142-173

Bloom, D and Sachs, D. J. (1998) Geography, Demography and Economic Growth in

Africa. Brookings Papers on Economic Activity, 1998 (2), 207-295.

Burneth, N.,K.Marble and H.A.Patrinos.(1995).Setting Investment Priorities in

Education. Finance and Development: Development, pp42-45.

Central Bank of Nigeria (2007) Annual Report and Statement of Accounts, CBN, Abuja

Central Bank of Nigeria (2005) Statistical Bulletin, CBN, Abuja

Central Bank of Nigeria (2008) Statistical Bulletin, CBN, Abuja

Chete, L.N. and B.W. Adeoye (2001) Human Capital and Economic Growth: The
Nigerian Experience, In.: Human Resource Development in Africa. Selected Papers for
2002 Annual Conference, Nigerian Economic Society, Ibadan, pp 79-102

Federal Government of Nigeria (1999) Nigerian Economic Policy 1999-2003. Abuja:

Federal Government of Nigeria (2004) National Economic Empowerment and

Development Strategy Abuja: National Planning Commision

Gemmell, N. (1996) Evaluating the Impacts of Human Capital Stocks and Accumulation
on Economic Growth; Some New Evidence. Oxford Bulletin of Economics and
Statistics 58(1), pp.9-29

Grammy, A.P. and D. Assane (1996), New Evidence on the Effect of Human Capital on
Economic Growth. Applied Economic Letters 4, pp121-124

Hamoudi, A. A. and Sachs, D.J. (1999) “Economic Consequences of Health Status: A

Review of Evidence”. Paper Presented at the Center for International
Development, Harvard University.

Harbison, F.H. (1973), Human Resources as the Wealth of Nations. New York: Oxford
University Press

Hoeffler, A.E. (1997) The Augmented Solow Production Mode; and the African Growth
Debate. Oxford: Oxford University, Center for study of African Economics.

June 28-29, 2010 23

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

Islam, N. (1995) Growth Empirics: A Panel Data Approach. Quarterly Journal of

Economics 110 (4), pp1127-1170

Lagerlof, N. (1999), Gender Inequality, Fertility, and Economic Growth. Mimeograph.

Department of Economics, University of Sydney

Loening, J.L. (2005). Effect of Pimary, Secondary and Tertiary Education: Evidence
from Guatemala. Policy Research Working Paper (3610)

Mankiw, G., D.Romer and D.Weil. (1992) A Contribution to the Empirics of Economic
Growth: Quarterly Journal of Economics 107, pp407-437

Mbanefoh, J.F. (1980) Sharing the Costs and Benefits of University Education in Nigeria:
A Suggested Approach. The Nigerian Journal of Economics and Social Studies
22(1), pp 67-84.

Meier, G.M. (1970) Leading Issues in Economic Development, 2nd Ed. Oxford: Oxford
University Press

Odusola, A.F. (1998), Human Capital Investment and the Empirics of Economic Growth
in Nigeria. In.: Rekindling Investment for Economic Development in Nigeria.
Selected Papers for 1998 NES Annual Conference, Nigerian Economic Society,
Ibadan, pp257-272

Okojie, C.E.E. (1995) Human Capital Formation for Productivity Growth in Nigeria.
Nigerian Economic and Financial Review 3: December, pp, 71-102.

Oladeji, S.I. and A.A.Adebayo (1996) The Scope for Human Resource Development
under the Adjustment Programme in Nigeria. Beyond Adjust: Management of the
Nigerian Economy. Nigerian Economic Society Annual Conference Ibadan: NES
pp441-460

Oyinlola, O.O. and J.A. Adam (2003) Public Expenditure and Human Development in
Nigeriia, In.: Human Resource Development in Africa. Selected Papers for 2002
NES Annual Conference, Nigerian Economic Society, Ibadan, pp 53-78

Pritchett, L (2001) Where has all the education gone? The World Economic Review 15(3)

Ramirez, A., Ranis G., and Stewart, F. (1997) Economic Growth and Human
Development. Center Discussion Paper No. 787.

Romer, P. (1990), Endogenous Technical Change. Journal of Political Economy 98(5).

pp5129-5150

Schultz, T.W. (1961) Investment in Human Capital. American Economic Review: March

June 28-29, 2010 24

St. Hugh’s College, Oxford University, Oxford, UK
2010 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

pp 1-17

Solow, R. (1956) A Contribution to the Theory of Economic Growth. Quarterly

Journal of Economics. LXX, pp65-94

United Nations Economic Commission for Africa (1990) Handbook of Manpower

Planning in Africa. Addis Ababa. UNECA

United Nations Development Programme (2009) Summary: Human Development Report

Nigeria 2008-2009, UNDP, Abuja.

Uwatt (2003) Human Resource Development and Economic Growth in Nigeria, 1960-
2000 Human Resource Development in Africa. Selected Papers for 2002 NES
Annual Conference, Nigerian Economic Society, Ibadan, pp 53-78

UNDP (2003) Human Development Report 2003-Millennium Development Goals. A

Compact among Nations to end Human Poverty, (New York: Oxford University
Press.

World Bank (1995) World Development Report 1995: Workers in an Integrating World.
Washington D.C.: Oxford University Press.

June 28-29, 2010 25

St. Hugh’s College, Oxford University, Oxford, UK