THE IMPACT OF HUMAN CAPITAL ON ECONOMIC GROWTH IN ETHIOPIA:

EVIDENCE FROM JOHANSEN CO-INTEGRATION APPROACH

BEFEKADU BEZABIH

JANUARY 2018

ADDIS ABABA, ETHIOPIA

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 St. Mary’s University
School of Graduate Studies
Institute of Agriculture and Development Studies

The Impact of Human Capital on Economic Growth in Ethiopia: Evidence

from Johansen Co-integration Approach

A Thesis Submitted to St. Mary’s University, School of Graduate Studies

In Partial Fulfillment of the Requirements for the Degree of Masters in Development Economics

Befekadu Bezabih

JANUARY 2018
ADDIS ABABA, ETHIOPIA

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 DECLARATION

I, the undersigned hereby declare that this thesis titled “The Impact of Human Capital on
Economic Growth in Ethiopia: Evidence from Johansen Co-integration Approach” is my original
work and no part of this work has been presented for a degree in any other university, and that all
sources of materials used and borrowed ideas for the thesis have been duly acknowledged in the
list of references provided.

Name: Befekadu Bezabih Signature: _____________________

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 ENDORSEMENT
This Thesis has been submitted to St. Mary’s University, School of Graduate Studies for
Examination with my approval as a university master’s student advisor.

Getachew Yoseph __________________

Advisor Signature
St. Mary’s University, Addis Ababa January, 2018

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 APPROVAL OF BOARD OF EXAMINERS
As a member of the Board of Examiners of the Master Thesis open defense examination, we
testify that we have read and evaluated the thesis prepared by Befekadu Bezabih under the title
“THE IMPACT OF HUMAN CAPITAL ON ECONOMIC GROWTH IN ETHIOPIA: Evidence
from Johansen Co-integration Approach” and we recommend that this thesis be accepted as
fulfilling the thesis requirements for the degree of Master of Arts in Development Economics

______________________ ________________________
Dean, Graduate Studies Signature

______________________ ________________________
Advisor Signature

_______________________ _________________________
Internal Examiner Signature

________________________ _________________________
External Examiner Signature

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 ACKNOWLEDGEMENT

My utmost and important praise and thanks goes to the almighty God who was in my side
through my thick and thin while working on this paper. I would also like to express my sincere
gratitude to my advisor Associate Prof. Getachew Yoseph for his continuous support on my
thesis study. My wife Rahel Kebede and my two kids Elhanan and Abigiya were my source of
motivation and perseverance and are always good reasons for living.

The cooperation and support of staff in the Ministry of Finance and Economic Cooperation
(MoFEC) and that of Economic and Planning Commission wouldn’t go unnoticed. I am highly
indebted for their relentless effort in providing all important data and information.

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 TABLE OF CONTENTS

ACKNOWLEDGEMENT ............................................................................................................. vi
TABLE OF CONTENTS .............................................................................................................. vii
LIST OF TABLES .......................................................................................................................... x
LIST OF FIGURES ........................................................................................................................ x
ACRONYMS AND ABBREVIATIONS ...................................................................................... xi
ABSTRACT .................................................................................................................................. xii
CHAPTER ONE ............................................................................................................................. 1
INTRODUCTION .......................................................................................................................... 1
1.1. BACKGROUND ............................................................................................................................. 1
1.2. STATEMENT OF THE P ROBLEM ................................................................................................ 4
1.3. RESEARCH OBJECTIVES AND QUESTIONS ............................................................................... 5
1.3.1 GENERAL OBJECTIVE ................................................................................................................. 5
1.3.2 SPECIFIC OBJECTIVES ................................................................................................................. 5
1.4. RESEARCH QUESTIONS .............................................................................................................. 6
1.5. HYPOTHESIS ................................................................................................................................ 6
1.6. SIGNIFICANCE OF THE STUDY ................................................................................................... 6
1.7. ORGANIZATION OF THE STUDY ................................................................................................ 6
1.8. SCOPE AND LIMITATION OF THE STUDY ................................................................................. 8
CHAPTER TWO ............................................................................................................................ 9
LITERATURE REVIEW ............................................................................................................... 9
2.1 T HEORETICAL LITERATURE REVIEW .......................................................................................... 9
2.2 EMPIRICAL REVIEW ................................................................................................................... 10
2.3 ECONOMIC GROWTH IN ETHIOPIA IN DIFFERENT ERAS ................................................................. 13
2.3.1 ECONOMIC GROWTH POLICES DURING THE IMPERIAL REGIME ............................................. 13
2.3.2 ECONOMIC GROWTH POLICES DURING THE DERG REGIME (1974 TO 1991) ......................... 14
2.3.3 ECONOMIC GROWTH POLICIES DURING EPRDF; 1991 AND ONWARDS ................................ 15
2.4 HUMAN CAPITAL EDUCATION POLICY IN E THIOPIA ..................................................................... 17
2.4.1 EDUCATION DURING THE IMPERIAL PERIOD . .......................................................................... 18
2.4.2. EDUCATION DURING THE DERG ............................................................................................. 20
2.4.3. EDUCATION DURING EPRDF .................................................................................................. 22
2.5. HUMAN CAPITAL HEALTH POLICY IN ETHIOPIA .......................................................................... 24

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CHAPTER THREE ...................................................................................................................... 26
RESEARCH METHODOLOGY.................................................................................................. 26
3.1 DATA DESCRIPTION , SOURCES AND TOOLS .................................................................................... 26
Table 1: Sources of data ................................................................................................................ 27
3.2 ECONOMETRIC MODEL SPECIFICATION ......................................................................................... 27
3.3 MODEL ESTIMATION ....................................................................................................................... 29
CHAPTER FOUR ........................................................................................................................ 30
RESULTS AND DISCUSSION ................................................................................................. 30
4.1 STATIONARITY TEST RESULT .......................................................................................................... 30
4.1.1 AUGMENTED DICKEY FULLER T EST (ADF) ........................................................................... 31
Table 2: Results for stationarity test ............................................................................................. 31
4.2 COINTEGRATED RANK OF VARIABLES ......................................................................................... 32
4.3 OPTIMUM LAG SELECTION CRITERIA ............................................................................................ 33
Table 3: Lag selection criterion .................................................................................................... 33
4.4 T HE J OHANSEN COINTEGRATION ESTIMATION ......................................................................... 33
4.6 ESTIMATION OF J OHANSEN TEST FOR COINTEGRATION ................................................................ 34
Table 4: Cointegration rank ......................................................................................................... 34
4.7 INTERPRETATION OF THE J OHANSEN ESTIMATION ........................................................................ 35
4.8 THE VECM ..................................................................................................................................... 35
4.8.1. VECTOR ERROR -CORRECTION MODEL .................................................................................... 36
Table 5: Vector error correction model ........................................................................................ 36
4.9 SHORT RUN ADJUSTMENT ............................................................................................................... 37
Table 6: Coefficient of cointegration ............................................................................................ 37
4.9.1 INTERPRETATION OF THE VECM ............................................................................................ 37
4.9.2 INTERPRETATION ...................................................................................................................... 38
4.9.3 SHORT RUN (SINGLE AND JOINT CAUSALITY OF LAGS ) .......................................................... 38
Short run causality test for Real GDP ........................................................................................... 38
Short run test for GCF................................................................................................................... 39
Short run causality test for education............................................................................................ 39
Short run causality test for Health ................................................................................................ 40
Short run causality test for labor force growth rate ...................................................................... 40
Short run causality test for inflation rate....................................................................................... 41
Table 7: Cointegrating equations .................................................................................................. 41

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Table 8: Johansen Normalization.................................................................................................. 41
Table 9: Results for Test of Autocorrelation ................................................................................ 42
Table 10: Results for residual normal distribution ....................................................................... 42
CHAPTER FIVE ......................................................................................................................... 44
CONCLUSION AND RECOMMENDATION ......................................................................... 44
5.1 CONCLUSIONS ............................................................................................................................. 44

5.2 RECOMMENDATIONS ................................................................................................................. 44

REFERENCES ............................................................................................................................. 46

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LIST OF TABLES

Table 1: Sources of data ................................................................................................................ 27

Table 2: Results for stationarity test ............................................................................................. 31

Table 3: Lag selection criterion .................................................................................................... 33

Table 4: Cointegration rank ......................................................................................................... 34

Table 5: Vector error correction model ........................................................................................ 36

Table 6: Coefficient of cointegration ............................................................................................ 37

Table 7: Cointegrating equations .................................................................................................. 41

Table 8: Johansen Normalization.................................................................................................. 41

Table 9: Results for Test of Autocorrelation ................................................................................ 42

Table 10: Results for residual normal distribution ....................................................................... 42

LIST OF FIGURES

Figure 1: Pilot of Variables .......................................................................................................... 32

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 ACRONYMS AND ABBREVIATIONS

ADF Augmented Dickey Fuller Test

AIC Akaike Information Criterion

ARDL Autoregressive Distributed Lag

CSA Central Statistic Agency of Ethiopia

EPRDF Ethiopian People Republic Democratic Front

FDRE Federal Democratic Republic of Ethiopia

GCF Gross Capital Formation

GDP Gross Domestic Product

GTP Growth and Transformation Plan

MOE Ministry of Education

MOFEC Ministry of Finance and Economic Cooperation

MOFED Ministry of Finance and Economic Development

OLS Ordinary Least Square

PASDEP Plan for Accelerated and Sustainable Development to End Poverty

RGDP Real Gross Domestic Product

SDPRP Sustainable Development and Poverty Reduction Program

TFP Total Factor Productivity

TGE Transitional Government of Ethiopia

VAR Vector Autoregressive

VECM Vector Error Correction Model

UNESCO United Nations Educational, Scientific and Cultural Organization

WBI World Bank Index

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 ABSTRACT

Using a time series data from 1974-2015, this study employs the augmented Solow human-
capital-growth model to investigate the impact of human capital on economic growth in Ethiopia.
Expenditure on public health and education were taken as proxy variables for human capital
development in order to see their impact on economic growth. The Augmented Dickey Fuller
test is employed to test for stationarity and Johansen Cointegration technique is used to validate
cointegration among variables as a sign of long run relationship. The error correction model is
used to adjust for the short run error correction. Further tests of autocorrelation and residual
normality distribution were done. The result of the ADF test has shown that all variables are non-
stationary at level I (0) and stationary at I (1). There are two cointegrating equations implying
convergence. The result of the error correction model show that the model is adjusting at a
relatively stable rate of 35 % towards the long run equilibrium. The result of the short run
causality tests show public expenditure on education, gross fixed capital formation and GDP
have significant effect while labor force growth rate, public expenditure on health and inflation
have shown to have statistically insignificant effect.

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 CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND
A nation’s human capital endowment, the skills and capacities that reside in people and that are
put to productive use can be a more important determinants of its long term economic success
than virtually any other resource (World Economic Forum 2016). Early neoclassical economic
growth models give due attention to physical capital accumulation and technology to bring
economic growth. In this regard, it is worth to note the Harrod (1939) and Domar (1946) models
of economic growth as cited in Todaro (2010); which give due emphasis to a higher level of
saving as having key role in the creation of better capital labor ratio (physical capital
accumulation). Their assumption stipulates that countries with higher saving rate will grow faster
than those with lower saving rate. In addition to the physical capital accumulation, they also
noted the need for technological improvement in order to have a long term effect on economic
growth.

Capital accumulation results when some proportion of present income is saved and invested in
order to augment future output and income (Todaro, 2012). Human capital formation or
development, according to Harbison (1973) cited in God’s Time (2014) can be seen as the
deliberate and continuous process of acquiring requisite knowledge, skills and experiences that
are applied to produce economic value for driving sustainable national development.

Human capital is the term economists often use for education, health, and other human capacities
that can raise productivity when increased (Todaro 2012). Human capital is productive
investments embodied in human persons, including skills, location, and health (Todaro, 2012).
Accumulation of human capital increases the productivity of workers and machines, equipment
and other physical capital through innovation and adapting technology.

Generally speaking, investment in education and health are believed to be the major components
of human capital accumulation. Educational investment can contribute to growth in two ways.
First educated labor force can directly participate in the production process as a productive

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factor. In this sense the accumulation of human capital would directly generate the growth of
output. According to Maria Jesus (2001), this is called the level effect (input level effect). On the
other hand, human capital can also contribute to raising technical progress (growth effect) since
education can ease innovation, diffusion and adoption of new technologies thereby increasing
productivity (Ibid). Education plays a key role in the ability of a developing country to absorb
modern technology and to develop the capacity for self-sustaining growth and development.
Education can also add to the value of production in the economy and also to the income of the
person who has been educated.

Health is an investment good that increases the future productive power of the work force.
Health is a prerequisite for increases in productivity as successful education relies among other
things, on adequate health. This implies that healthier workers are more energetic and strong and
their productivity is high. In this regard, health has a wider concept than mere understanding of
absence of sickness. It is the ability of people to develop to their potential during their entire
lives. In that sense, health is an important asset individuals possess, which has intrinsic value
(being healthy is a very important source of well-being) as well as instrumental value (Bloom,
Canning & Sevilla 2004).

Greater health capital may improve the return to investments in education; in part because health
is an important factor in school attendance and in the formal learning process of a child. A longer
life raises the return to investments in education; better health at any point during working life
may in effect lower the rate of depreciation of education capital (Todaro, 2012).

Generally speaking, if done in compliance with equity and efficiency, investments in education
and health will have positive impacts on income and the economy. Improved health and
education help families escape some of the vicious circles of poverty in which they are trapped
in. Thus both health and education can be seen as vital human capital components leading to
growth and development.

Economies that are growing rapidly are the ones that have given direct attention to their human
capital. “…differences in income then must come from differences in capital, labor, and
technology” (Mankiw 2013). With higher income, people and governments can afford to spend
more on education and health, and with greater health and education, higher productivity and

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incomes are possible. Because of these relationships, development policy needs to focus on
income, health, and education simultaneously.

This study will look at the impact of human capital formation on economic growth in Ethiopia
considering both education and health aspects of human capital components in to consideration.
Investments in education and health are taken as proxy variables for human capital
developments. The results of the study is believed to contribute to the important implications on
existing understandings of the contributions of human capital on economic growth in general and
will further serve as insight for future studies on the causes of regional disparities in economic
growth in Ethiopia, a contemporary popular subject of debate.

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 1.2. STATEMENT OF THE PROBLEM

Ethiopia alongside its Sub-Saharan counterparts has increasingly been investing much on her
human capital development (Health and Education) for the last few decades. There appears to be
though a continuing debate as to whether a return on investment in these identified sectors is
worth noting, seeing it from a short and long run perspective while quality issues remain to be
areas of concern. While this being a subject of debate, persisting questions as to which level of
education and health situation are more responsive to economic growth are unfolding. In this
regard, while the relative importance of the level of education and health condition is given little
attention, much of the focus of this study would lie on their long and short run causality and
explanation of economic growth expressed in real GDP.

Benhabib and Spiegel (1994) have attempted to empirically distinguish between considering
human capital as an ordinary input in the production process and the growth of total factor
productivity as a function of the level of human capital. They have considered human capital as
level of education attained only. They used estimates of physical and human capital stocks to
examine cross-country evidence on the determinants of economic growth. Noting what has been
casted by Nelson and Phelps (1966), they have shed their doubt on the specification of treating
human capital simply as another factor in growth accounting. In their assumption, the level of
human capital affects productivity by determining the capacity of nations to innovate new
technologies suited to domestic production. Furthermore, they adopted the Nelson and Phelps
(1966) model to allow human capital levels to affect the speed of technological catch-up and
diffusion. Hence, they assumed that the ability of a nation to adopt and implement new
technology from abroad is a function of its domestic human capital stock.

On the contrary, Mohan (2010) treated human capital as an independent production function
using the human capital augmented growth model and found human capital as playing an
important role on economic growth mainly as an engine for improvement of output level. Several
other empirical studies, including Schultz (1960, 1963), Denison (1962, 1974), Becker (1961),
Harbison and Myers (1964), Mankiw, Romer and Weil (1992) and many others to some extent
have shown increased human capital appears to explain a substantial part of the growth of output
in both developed and developing countries.

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Recent studies conducted in Ethiopia in this regard rather have shown to have consistent results.
For example Dinkineh (2015) in his study showed that public expenditure on health and
education, primary and secondary school enrolment have positive and statistically significant
effect on economic growth both in the long run and short run and physical capital showed
positive whilst inflation has negative effect on economic growth. Tertiary school enrolment, on
the other hand has shown insignificant effect on economic growth both in the long run and short
run. Kidanemariam (2015) on the other hand, using the ARDL approach to co-integration
showed a stable long run relationship between real GDP per capita, education human capital and
health human capital. Accordingly, the estimated long run model indicated that human capital in
the form of health has big positive impact on real GDP per capita rise, followed by education
human capital inter alia. Irrespective of these results, there is though neither general consensus
on literature nor consistent use of similar proxies for human capital measurements. This study
motivated by the apparent expansionary approach of the government on education and health
sectors expenditure, primarily aims to determine the contribution of human capital on economic
growth using expenditure on health and education as proxy variables. The study would also
suggest policy implications for future spending.

1.3. RESEARCH OBJECTIVES AND QUESTIONS

1.3.1 GENERAL OBJECTIVE

 The general objective of this study is to determine as to whether human capital formation
has an impact on economic growth in Ethiopia.

1.3.2 SPECIFIC OBJECTIVES

 To determine whether there is any causal relationship between human capital
accumulation; health and education expenditure and economic growth in Ethiopia
 To derive policy implications for future spending on the sectors

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 1.4. RESEARCH QUESTIONS

 Is there any causal relationship between human capital formation and economic growth in
Ethiopia?
 Is economic growth in Ethiopia explained by human capital formation?
 Does human capital accumulation have a significant long-run and short-run impact on
economic growth of Ethiopia?

1.5. HYPOTHESIS

H1=Factor accumulation (human Capital) has contribution to economic growth in Ethiopia

1.6. SIGNIFICANCE OF THE STUDY

The theories and facts underlying the concept of human capital and its contribution to the
national economy have been a growing subject area of interest for researchers. The conventional
approach to measuring the stock and development of human capital has frequently been related
to educational enrollment ratios and expenditures on educational proxies and life expectancy and
“under 5” mortality ratios in relation to health proxies. This study, taking both educational and
health aspects of human capital, will give insight to policy makers in their decisions determining
public spending on educational and health sectors. It is also the author’s belief that the study will
further support policy makers to compare financial expenditures on the stated sectors vis a vis
the sectors contributions in the national economy of Ethiopia.

1.7. ORGANIZATION OF THE STUDY

This thesis work is organized into five chapters. The first chapter contains: introduction of the
study, statement of the problem, research objectives, research hypothesis, and significance of the
study, scope and limitation of the study. In chapter two, theoretical and empirical literatures
conducted both in Ethiopia and other countries are reviewed, education and health policies
during the different government era in Ethiopia are discussed. Chapter three is devoted for
research methodology including, model specification, data types, collection methods and
estimation issues and procedures are discussed in detail. In Chapter four, different hypothesis

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testing and empirical results of data analysis are reported and evaluated. In the last chapter,
discussions and implications of possible policy propositions are forwarded based on empirical
findings of the study.

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 1.8. SCOPE AND LIMITATION OF THE STUDY

Informal and non-informal learning activities such as personal learning and On-the-Job training
are given less emphasis in this study.

The study also plays down to consider the reverse effect i.e., the impact of economic growth on
health and education and rather focuses on the vice versa. Moreover, though it is generally
understood that human capital overtime depreciates, the study doesn’t assume so.

Looking at the variables in the model and the data on hand, as a rule of thumb, the study would
have selected different measurements for human capital stock as explained in different
literatures. It is difficult that human capital itself independently contributes to individual
development and national economic growth. According to Ashton & Green (1996), it is
necessary that the link between human capital and economic performance should be considered
within a social and political context to precisely measure the human capital. However, the study
fails to consider the non-monetary aspects of human capital such as, the social, political, cultural
and other factors. It would have been consistent to the intention of the researcher to see the
existing economic variations in the country at regional level as to whether they are attributed to
differences in human capital developments. However, data access and availability limited the
researcher’s intention.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 THEORETICAL LITERATURE REVIEW

The foundation of the human capital theory lies in the fact that individuals and firms invest in
human capital based not on present gains but on future pecuniary and non-pecuniary returns.
Investments include various aspects such as schooling, training, acquiring information,
migration, and activities that improve an individual’s health (Mikaela Backman, 2013).

Traditionally, economic theory has given emphasis to physical capital accumulation as the most
robust source of economic growth at least in the short-run, with exogenous technical progress
being the long-run determinant of growth. The exogenity of technological progress in the
neoclassical growth model and the difficulty of explaining long-term economic growth (because
of diminishing returns to physical capital) have restricted the analytical capacity of the
neoclassical model and its empirical verification (SushiL Kumar and Giri Jasankar Malik, 2010).

Human capital theory suggests that individuals and society derive economic benefits from
investments in people (Sweetland, 1996). Education is often referred to as the prime human
capital component but many authors including Becker (1993) and Schultz (1997) have argued
that health and nutritional expenditure is also a part of human capital investment. In this regard,
modern theory of economic growth argues that human capital, especially one that accommodates
education and health has the principal role on achieving economic growth and development
(Gyimah-Brempong and Wilson, 2005).

The concept that investment in human capital promotes economic growth arguably dates back to
the time of Adam Smith (1776) and the early classical economists who give emphasis to the
importance of investing in human capital. Paul Romer (1990) argues that every nation’s
macroeconomic objective revolves around sustained economic growth accompanied with social
development and in this regard he opines human capital is deemed as an essential ingredient.
However, Ralph Hipe (2013) remarks that human capital has to be measured quantitatively to
validate theoretical frameworks.

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Despite this necessity of human capital measurement, traditional method of the human capital
measurement have often been criticized for their number of limitations such as for example,
Wolf (2002) suggests that some of indicators can be actually considered as incomplete ones. To
support his assertion, he exemplifies that a worker’s wage one of human capital indicators as
proxies-hardly measures ‘authentic human capital’. By the drawback of traditional human capital
measurement, it is acceptable to measure the authentic human capital instead of utilizing proxies
such as income and productivity.

Second, it is difficult that human capital itself independently contributes to individual

development and national economic growth. According to Ashton & Green (1996), it is
necessary that the link between human capital and economic performance should be considered
within a social and political context to precisely measure the human capital.

Despite the interlinkages between human capital and growth, most empirical studies have
employed reduced-form equations that do not capture feedback effects. The literature often
focuses on only one segment of the social spending-social indicators-growth nexus. That is, it
either analyzes the growth effects of improving education or health indicators, or the impact of
public spending on these indicators. Furthermore, research on the first stream has concentrated
essentially on education capital, and has often focused on the impact of the initial stock of
education capital on growth. As such, the empirical literature on the effects of health capital on
growth is relatively thin. To this end, human capital has been measured in a range of different
ways to the extent that one may end up in wondering to find the “right” model for the topic. The
following empirical literature takes note of some of the measurement methods that are often in
use in literatures.

2.2 EMPIRICAL REVIEW

Different researchers have used deferent measurements in order to see the contribution of Human
capital. Using school enrollments and life expectancy as proxy for human capital stock and
public expenditure on education and health for human capital investment, Eggoh, Houeninvob &
Sossoub (2015) found human capital stock (school enrollment and life expectancy at birth) have
positive effect on economic growth while human capital investment (public expenditures on

10
education and health) has a negative impact on economic growth. Literacy rates and educational
attainments are other alternatives sought by other authors.

Jess Benhabib and Mark M. Spiegel (1994) have attempted to empirically distinguish between
considering human capital as an ordinary input in the production process and the growth of total
factor productivity as a function of the level of human capital. They have considered human
capital as level of education attained only. They used estimates of physical and human capital
stocks to examine cross-country evidence on the determinants of economic growth. Noting what
has been casted by Nelson and Phelps (1966), they have shed their doubt on the specification of
treating human capital simply as another factor in growth accounting. In their assumption, the
level of human capital affects productivity by determining the capacity of nations to innovate
new technologies suited to domestic production. Furthermore, they adapted the Nelson and
Phelps (1966) model to allow human capital levels to affect the speed of technological catch-up
and diffusion. Hence, they assumed that the ability of a nation to adopt and implement new
technology from abroad is a function of its domestic human capital stock.

Atardi and Sala-i-Martin (2003) argue that Africa's growth tragedy of the 20th century can be
explained by low endowments of human capital, poor external environment, and political
instability. Cited in Hippe (2013) according to Becker (2002), human capital is the most decisive
type of capital in contemporary economies. He refers to studies showing that human capital
accounts for over 70% of total capital accumulation in the US representing more than a fifth of
total GDP. Consequently, “technology may be the driver of a modern economy, especially of its
high-tech sector, but human capital is certainly the fuel” (ibid).

Paul Romer (1990) on the other hand notes that an important distinction should be made between
human capital and abstract technological knowledge. He further notes that although human
capital involves the acquisition of knowledge, it differs in one respect from abstract knowledge
such as invention or design. As such, human capital is a private good in that it is tied to a person
and is therefore rival and excludable.

Related and recent studies in Ethiopia have shown consistent results. For example Dinkineh
(2015) showed that public expenditure on health and education, primary and secondary school
enrolment have positive and statistically significant effect on economic growth both in long run

11
and short run and physical capital shown positive whilst inflation has negative effect on
economic growth (ibid). Tertiary school enrolment on the other hand has shown insignificant
effect on economic growth both in the long run and short run.

Kidanemariam (2015) on the other hand, using the ARDL approach to co-integration showed a
stable long run relationship between real GDP per capita, education human capital and health
human Capital. Accordingly, the estimated long run model indicated that human capital in the
form of health have big positive impact on real GDP per capita rise followed by education
human capital, among other things.

A country can raise its human capital by providing education and training. Additionally, people
gain ability (knowledge) through experience and by interacting with educated people. Nelson
and Phelps (1966) argue that human capital raises productivity through innovation and
adaptation of technology.

Explaining the lack of clarity in a continuing debate on the relative importance of level of
education on per capita income, Gyimah Brempong K., Oliver Paddison, & Workie Mitiku
(2006), mention one aspect as private and social returns to education, based on which there have
been suggestions that African countries should support primary education at the expense of
higher education since the social returns to the former are much higher than those of the latter.
Forgetting the notion of level of education as substitutes in their relative importance to growth,
they consider them as compliments and continue to explain that one of the many ways to
evaluate the social impact of higher education in human capital is to estimate its impact on the
growth rate of per capita income.

Easterly (2002), writes at length on Ethiopia’s growth in TFP within the three different regimes
namely that of the monarchy, Marxist and reformist periods as being 1.26%, -1.22% and 2.58%,
respectively. Accordingly the difference in growth of TFP as part of human capital exhibited in
these regimes are believed to be due to their different economic policy, political instability and
natural disaster like drought.

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2.3 ECONOMIC GROWTH IN ETHIOPIA IN DIFFERENT ERAS
Ethiopia is the oldest independent and arguably non-colonized country in Africa. It is the tenth
largest country in Africa, covering 1,104,300 square kilometers (with 1 million sq km land area
and 104,300 sq km water) and is the political power and major constituent of the landmass
known as the Horn of Africa. It is a country with great geographical diversity ranging from peaks
up to 4,550m above sea level down to a depression of 110m below sea level. More than half of
the country lies above 1,500 meters. The predominant climate type is tropical monsoon, with
three broad climatic variations: the “Kolla” or hot lowlands, below approximately 1,500 meters,
the “Wayna Degas” at around 1,500- 2,400 meters and the “Dega” or cool temperate highlands
above 2,400 meters. (HSDP, 2010)

According to projections from the 2007 population and housing census the estimated total
population in 2015 is 99.4 million. It is one of the least urbanized countries in the world with
about more than 4/5th of the population living in rural areas (81.5% rural vs only 19.5% urban)
and nationally, the average household size is 4.7 persons. The population age pyramid has
remained predominately young.

The economic policy and hence performance of the country varied with the regimes that ruled
the country. In the last four decades for example, the Ethiopian economy has changed from a
relatively liberalized economy (till 1974) to a more controlled one (1974-1989/90) and again
back to what appears to be a liberalized one (after 1991) or at least what the government claims it
to be.

2.3.1 ECONOMIC GROWTH POLICES DURING THE IMPERIAL REGIME

Traditionally what is called “the Imperial Regime’ refers to the reign of emperor Haile-Sellasie I
and the time span between (1930-1974) in particular and as to some authors it dates back to the
emperor’s immediate predecessors in general. In terms of development policy trajectory
followed, Christopher Clapham (2006) describes the characteristics of this period as lacking
dominant paradigm for the country’s economic and political development except different
initiatives tried to be introduced from here and there. There was very little to be said in terms of
economic and social development in Ethiopia between 1941 and 1957 (Eshetu, 1990).

13
According to Georgi G. (1981), cited in ukessays.com (2013), the imperial government of Haile-
Sellasie was believed to be the first Ethiopian government to craft and exercise different
development policies as Ethiopia was the first African state to have a recorded attempt of
economic development planning. But the plans determined only general trends and likely
development rates as they gave an extremely generalized allocation to particular sectors of the
economy.

During this time, three five-year plans were prepared for the development of the economy with
different targets and area of priorities. They were:

1. The first five year plan of (1957-62)

2. The second five year plan of (1963-67) and
3. The Third five year plan (1968-73)

During 1941-1957, foreign trade plus local whole sale trade was mainly in the hands of
foreigners (mainly Armenians, Greeks, Italians, Indians and Arabs) which left minimal
commercial activities in the hands of the local people. However, the period has shown that the
country’s economy achieved sustained economic growth in general.

2.3.2 ECONOMIC GROWTH POLICES DURING THE DERG REGIME (1974 TO 1991)
This period has evidenced a major shift in economic policy from its predecessors. The Derg
adopted the socialist ideology, which basically was the ideology of the Ethiopian educated elite
of that period. During this time, central planning was introduced first in the form of what was
then referred to as National Revolutionary Development Campaigns (1978-1984) and
subsequently in the form of a Ten-Year Perspective Plan (1984/85 – 1993/94). The goals of the
socialist inclined military regime by way of its Ten-Year Perspective Plan (TYPP), was to
ultimately build a socialist economy.

The structure and objective of the economy was changed alongside the objective of the socialist
government. During the period 1974-1991, the performance of the economy was the worst
during the planned economic era in which real GDP registered an average growth rate of 2.3%
per annum (per capita income growth being -0.4%) between 1974/75 and 1989/90 (Geda, A. and
Befekadu Degefe, 2002, cited in Woubet, 2006). The Public ownership of rural land

14
proclamation or what is commonly referred to as “land to a tiller” issued by the Derg regime on
March 4, 1975 and consequent events and formations of different associations and cooperatives
marked the pick time in this era

2.3.3 ECONOMIC GROWTH POLICIES DURING EPRDF; 1991 AND ONWARDS

According to African development bank group, (2000:4), the initial stage of the Transitional
Government popular general objective was given as attaining fast broad based economic
development and in terms of macroeconomic policy, this period has witnessed a marked
departure from the previous ‘Socialist’ system or the ‘Derg regime’. According to Alemayehu
(2001:5), this difference lies on openly adopting a market-oriented economic policy. During the
start of year 2000 and onwards Ethiopia often seemingly announced her official economic policy
direction as being that of “Developmental State Model” which before then was practiced and
followed by the East Asian countries, many of which are categorized as “Tiger Economies”.
Some authors even argue on the dates that Ethiopia started to follow developmental state model
by taking it as far back as year 1995, when the government for the first time was established as
Federal Democratic Republic of Ethiopia (FDRE).

This is clearer in the often quoted 51 pages-long incomplete monograph “for not quotations”
Masters’ Thesis of the late Prime Minister of Ethiopia, Meles Zenawi than anywhere else.
Among the propositions contained in Meles’s developmental state paradigm, are:

Neo-liberalism is a dead end, incapable of bringing about the African renaissance;

Social development is essential for economic development and social development
cannot be brought about by market mechanisms alone;
Technological development is at the heart of economic development, and hence,
development in underdeveloped Africa cannot be brought about by market mechanisms
alone;
Market failures are deep and pervasive in deveining countries and market mechanisms
alone cannot bring about accelerated development
The engine of development at initial phases has to be agriculture, and this is so not only
because growth in the relatively massive agricultural sector will have bigger impacts on

15
 total growth of the economy directly but also because agricultural growth accelerates
non-agricultural growth and structural transformation even more;
Equitable distribution of assets in the rural areas plays a critical role in accelerating
agricultural development and overall development and structural transformation;
Developing countries face formidable market failures and institutional inadequacies
which create vicious circles and poverty traps, which can adequately be addressed only
by an activist state;
Development is a political process first and economic and social process later;
A stable democracy can emerge in a poor country and
A developmental state can be a democratic state; and indeed; a democratic developmental
state is likely to be more successful in its development efforts than others.

What followed then after in Ethiopia was all about talks of poverty eradication, sustainable
development, accelerated development, growth and Transformation and etc.

Therefore since 2002 the FDRE government came up with successive huge and stretched
strategic plans including SDPRP (2002/03-2004/05), PASDEP (2005/06-2010/11) and GTP1
(2010/11-2014/15) and GTP2 (2014/15-2019/20) with the objective of bringing an accelerated
and sustainable development, ensuring the fruits of development accrue to the poor people,
putting an end to the country's status as an international alms recipient and to progressively
improve her standing in the global integration process, realizing accelerated economic
development through strengthened free market economy (MOFED, 2002).

The common characteristics of these plans are bringing radical change in the economy, creating
huge demand, changing small and fragmented plan into massive and coordinated plan by
selecting key sectors in the economy such as rural and agricultural development policies and
strategies, food security, pastoral development, roads, water resource development and
Education and it was believed that this will transform other sectors which were previously
associated with a concept of unbalanced growth. Accordingly, some outstanding sectors will
create huge demand and pull other economic sectors.

16
2.4 HUMAN CAPITAL DEVELOPMENT: EDUCATION POLICY IN ETHIOPIA
Education is a complex issue to comprehend. But to simply define it, it is a process by which
man transmits his experiences, new findings, and values accumulated over the years in his
struggle for survival and development, through generations (FDRGE, 1994). Education enables
individuals and society to make all-rounded participation in the development process by
acquiring knowledge, ability, skills and attitudes. It also aims at strengthening individuals’ and
society’s problem-solving capacity, ability and culture starting from basic education and at all
levels. ibid, education enables man to identify harmful traditions and replace them by useful
ones. It helps man to improve, change, as well as develop and conserve his environment for the
purpose of an all-rounded development by diffusing science and technology into the society.
Education also plays a role in the promotion of respect for human rights and democratic values,
creating the condition for equality, mutual Understanding and cooperation among people.
Education does not operate in isolation however. It rather has to be integrated with research,
practice and development to contribute towards an all- rounded development of society. In
Ethiopia, education dates back to the sixth century when the Sabean alphabet was introduced
along with Christianity. Beginning in the early years of the Christian era, the churches of
Ethiopia developed school system which over the centuries served not only as focal points for
learning but also prepared the nation‘s religious and governmental leaders. Church educations
remained the predominant form of education until the commencement of modern secular
education in Ethiopia. The indigenous system of church education had its parallel in the schools
of Falashas, and the Quranic schools of the Muslims (Woubet, 2006).

Because, any investigation into the workings of the environment and the universe in general is
regarded as anti-Christian and sinful, studies of the sciences, and domestic handicrafts were very
limited and often discouraged. The primary urge was religious rather than scientific and
developmental. The primary purpose of church education was to lead men to accepting the
existing order of things as it is, to preserve whatever has been down through the years, and in
turn to pass it unchanged to the next generation. (Ibid).It tended to stifle healthy curiosity and
independent thinking. The Pedagogy was based on repetition and memorization, with strict
adherence to the convention preferred by the teacher.

17
According to Teshome (1979), church education has not been impartial in the provision of
education to the public and didn‘t serve the whole nation. But no other church in Africa has had
such a great impact on the development of education as the Ethiopian Orthodox Church. In the
long history of church education, Ethiopia evolved a particularly Ethiopian education system.
The full curriculum consisted of religious teachings, prose, poetry and poems as well as
documentation in Geez and Amharic. It is emphasized that education has, meaning only when in
its cultural context. But the pattern of education is believed to be changed very little in contrast
to the emerging socio economic transformations. Little was done to combine the educational
effort of an ancient church with that of a government system. Hence, any account of education in
Ethiopia must recognize the contributions made by church education.

The Ethiopian secular education system has been to a large extent foreign and alien to the
nation‘s needs and requirements. It was emphasized that Ethiopian education should neither be
French, American, British or Italian. But it was not possible to have a sensible extension of
education to the existing socio economic conditions in the country, afterwards. Developments in
the field of modern education can be discussed in the three phases as follows.

2.4.1 EDUCATION DURING THE IMPERIAL PERIOD .

At the beginning of the twentieth century, the education system's failure to meet the needs of
people involved in statecraft, diplomacy, commerce, and industry led to the introduction of
government-sponsored secular education. Hence the more planned and coordinated expansion of
education has been done after 1941. The primary objective of education had been to produce
trained manpower that could run the emergent state bureaucracy. Particularly after 1941, the
government‘s main concern was to replace expatriates that worked at various levels in the state
machineries by Ethiopian nationals. In this respect the perspective of education was very limited.
This leads to the establishment of the first public school in Addis Ababa in 1907, and a year later
a primary school opened in Harer. Foreign languages, elementary mathematics, and rudimentary
science were taught in French to a limited number of students, along with Amharic and religious
subjects (Teshome, 2006).

The Italian occupation (1936-1941) and the Second World War seriously disrupted the
development of modern secular education started during the Menelik era. It was after 1941 that a

18
series of concrete educational policies were introduced for the promotion of education in the
country. The Ethiopian government continued to believe that education held the key to its
development. To meet this need, reconstruction began with the re-establishment of the Ministry
of Education in 1942. To enhance expansion, a Board of Education was established in each
region and an educational tax was also introduced to partly finance education. To supplement
government efforts, private and voluntary organizations were encouraged to open schools. The
missionaries were also, for the first time, officially invited to participate in providing educational
services. From 1942 until 1955, the Ethiopian Government was engaged in the expansion of the
education system. The high expenditure on education in relation to total expenditure, as well as
the rapid growth of student enrolment showed the commitment of the Ethiopian government to
the expansion of education. Non formal education in the form of adult education and literacy
programs were coordinated and sponsored by the adult Education and Literacy Department of
the Ministry of Education. Work oriented or functional literacy programs directed to workers in
specific fields such as agriculture, textile and other activities were provided. According to
Woubet (2006) these efforts are reinforced by the measures taken during the course of the three
consecutive five-year development plans which have provided a strong role for education to play
in the economy. Among these objectives are;

1. To provide education for the majority, particularly for the rural population, in line with
more adequate networks of modest rural roads and bus services.
2. To provide an educational system which create a modern scientific outlook in life, which
will be in harmony with Ethiopia‘s cultural tradition.
3. To provide education that develops positive attitude towards manual work and practical
skills.
4. To place appropriate emphasis on the quality of education and promoting efficiency.
5. To provide a system within which a more effective national medium of communication
through the Amharic language can be realized.

In relation to these objectives, there were two institutions of higher education: Haile Selassie I
University in Addis Ababa, formed by imperial charter in 1961, and the private University of
Asmera, founded by a Roman Catholic religious order based in Italy.

19
As a result, from 1942 to 1972, the education sector was allowed to expand with confidence and
optimism. Gross Primary enrollment increased by 60% between 1968 and 1972. Between 1961
and 1971, the government expanded the public school system more than fourfold, and it declared
universal primary education a long-range objective. In 1971 there were 1,300 primary and
secondary schools and 13,000 teachers, and enrollment had reached 600,000. (MOE, 1975)

However, the optimism was not sustainable. The schools were found to be highly inefficient
especially in terms of dropouts. 50% of grade one students had dropped out by the end of the
second year of schooling. Grade five had less than 10 percent of the students of grade 1. 17. The
issue of equity was not properly addressed. Education in the beginning was an urban male
dominated phenomenon. Under the pressure of growing public dissatisfaction and mounting
student activism in the university and secondary schools, the imperial government initiated a
comprehensive study of the education system. Completed in July 1972, the Education Sector
Review (ESR) recommended attaining universal primary education as quickly and inexpensively
as possible, realizing the curriculum through the inclusion of informal training, equalizing
educational opportunities, and relating the entire system to the national development process.

The ESR criticized the education system's focus on preparing students for the next level of
academic study and on the completion of rigid qualifying examinations. Also criticized was the
government's lack of concern for the young people who dropped out before learning marketable
skills, a situation that contributed to unemployment.

2.4.2. EDUCATION DURING THE DERG

After the overthrow of imperial rule, the provisional military government dismantled the feudal
socioeconomic structure through a series of reforms that also affected educational development.
The structure and organization of educational activities were changed alongside the objectives of
the socialist government. In the National Democratic Revolution Program of the Ethiopian
Government (April, 1976), Educational Guideline was issued; which states, “an educational
program that will provide free education, step by step, to the broad masses”. The Government‘s
goals for education are (1) education for production, (2) education for scientific consciousness,
and (3) education for political consciousness. The new regime nationalized all private schools,
except church-affiliated ones, and made them part of the public school system. Additionally, the

20
government reorganized Haile Selassie I University and renamed it Addis Ababa University soon
after the military government initiated reforms of the education system based partly on ESR
recommendations and partly on the military regime's socialist ideology.

According to TGE (1994), The general policy program did not provide an elaborate policy of
education up until 1984/85 when A Ten Year Perspective Plan (1974/75-1984/85) was adopted
with the following major goals of the education sector.

1. To provide education that meets the basic needs of the people as well as serves as an
instrument in the struggle against feudalism, imperialism and bureaucratic capitalism.
2. To give priority to providing polytechnic education to all those children with in
appropriate age bracket
3. To provide skilled manpower in such numbers proportions and quality as needed.
4. To promote continued education
5. To eradicate illiteracy and expand preschool education.

The military regime worked toward a more even distribution of schools by concentrating its
efforts on small towns and rural areas that had been neglected during the Imperial regime. With
technical assistance from the Ministry of Education, individual communities performed all
primary school construction. In large part because of such community involvement, the number
of primary schools grew from 3,196 in 1974/75 to 7,900 in 1985/86, an average increase of 428
schools annually. The number of primary schools increased significantly in all regions except
Eritrea and Tigray, where there was a decline. (Tekeste Negash,1996)

A major move towards expansion of non-formal education was made by the Socialist regime.
Two main programs were launched, the National Work Campaign for Development through
Cooperation, and The Ethiopian National Literacy Campaign. One of the success stories in the
socialist regime has been the achievement in terms of reduction of illiteracy rate in the country.
The national literacy campaign began in early 1975 when the government mobilized more than
60,000 students and teachers, sending them all over the country for two-year terms of service.
This experience was crucial to the creation in 1979 of the National Literacy Campaign
Coordinating Committee (NLCCC) and a nationwide effort to raise literacy levels. The literacy
rate, fewer than 10 percent during the Imperial regime, increased to about 63 percent by 1984,

21
according to government figures. The literacy campaign received international acclaim when the
United Nations Educational, Scientific, and Cultural Organization (UNESCO) awarded Ethiopia
the International Reading Association Literacy Prize in 1980.(Teshome ,1988).

However the Derg failed to build on what was already achieved in the past. Recommendations of
the ESR were barely followed as claimed. Private sector development and the development of
the market incentive structure both in the education sector and in the labor market were highly
discouraged. The Education system has been centralized in both the Imperial and the Derg
regimes. And the red tape in a highly decentralized system of education might incur wastes and
stifle growth (Teshome, 1988).

2.4.3. EDUCATION DURING EPRDF

According to the Transitional Government of Ethiopia (1994), it was necessary to replace the
educational system that served the old discarded order by the new one. The development of the
education sector in Ethiopia has been at an early stage. On the eve of the ongoing educational
reform process, which began in 1994 following the endorsement of the New Education and
Training Policy, enrollment in primary education stood at about 2.81 million. This includes over-
age pupils that amount 34 % of the school-age population. Likewise, enrolment ratio in
secondary level stood at about 15% and in the third level at 1 %. 29 Compared to African
countries, Ethiopia‘s enrolment ratios fared among the lowest in primary education and
somewhat better though below average in secondary education. Similarly, enrollment in all
levels of education is male biased, the tertiary level being worse. (TGE, 1994)

The new strategy presupposes the overall lack of coordination between education, training,
research and development efforts in the country. The objectives of Ethiopian education as stated
in the various documents of The Transitional Government of Ethiopia, The Education and
Training Strategy (1994) are summarized as follows.

1. To provide a good quality primary education with an ultimate aim of achieving Universal
Primary Education.
2. To make education relevant by providing problem solving skills and an all rounded
education catering to the needs of the individual and the society.

22
 3. To provide vocational education and training at different levels attuned to the manpower
requirements of the economy.
4. To provide a secondary education of appropriate quality in an equitable way.
5. To promote higher education of good quality, relevance and focusing on Research &
Development.
6. To make available special and non-formal education in line with the needs and capability
of the country.
7. To improve the quality of training, professional competence and career structure of
teachers and other professionals.
8. To strengthen the management and organization of the educational system so as to make
it decentralized, coordinated professional and efficient.
9. Increase the financing of education by encouraging community participation, introducing
cost sharing mechanisms, involving the private sector in the provision of education.
10. To improve the collaboration and coordination of the education sector with other relevant
sectors.
11. Production of lower, middle, and higher level skilled manpower that can participate in
the country‘s economic growth and social development.

The structure of the Ethiopian education system encompasses formal and non-formal education.
But it is not clear how the non-formal education will be implemented. For this reason, it is
viewed as open-ended in terms of training program and in terms of institutional arrangement.
The emphasis has shifted to the formal education; addressing the problems of low enrolment in
the formal schools, rectifying gender imbalance and the like. (TGE, 1994)

The New Education and Training Policy also addressed the issues of technical Vocational
training. Thus, it is stipulated in the document that Parallel to general education, diversified
technical and vocational training will be provided for those who leave school from any level of
education for the development of middle level manpower. (MOE, 1994)

It was also stipulated that every nation and nationality has the right to learn in its own language
at least at the basic education and general primary level. But this has put into question the speed
at which the adaptation would take place in terms of preparation and provision of teaching

23
materials and training of the appropriate pedagogical and managerial staff. This change has been
revolutionary rather than a cautionary transformation. In this respect, a study by Workalemahu
(2004) shows that the necessary preconditions were not fulfilled to select the language as a
medium of instruction: there were no available curriculum materials; teachers did not get
adequate training; there was imposition on those who don‘t speak the local language.

High repetition rates intensify the stress on already overburdened schools and increase the
numbers of children and youth who eventually drop out of school completely. Too often,
investment is thought to be simply more schools, and places for more kids in school. These are
necessary conditions but insufficient alone to bring about needed development gains. More is
needed, including increasing curriculum relevancy, training teachers to use the most effective
pedagogy, improving the way schools are organized and managed, and involving parents and the
larger community in supporting schools and ensuring quality education (Woubet ,2006)

2.5. HUMAN CAPITAL DEVELOPMENT: HEALTH POLICY IN ETHIOPIA

The main cause of many of Ethiopia's health problems is the relative isolation of large segments
of the population from the modern sector. Additionally, widespread illiteracy prevents the
dissemination of information on modern health practices. A shortage of trained personnel and
insufficient funding also hampers the equitable distribution of health services. Moreover, most
health institutions were concentrated in urban centers prior to 1974 and were concerned with
curative rather than preventive medicine. (HSDP, 2010)

Little can be referred about the previous governments’ effort in terms of establishing health
facilities and access in a concerted manner. It is only recently that the government has given
much emphasis to the health problems. Hence, the current Government therefore accords health
a prominent role in its order of priorities and is committed to the attainment of these goals
utilizing all accessible internal and external resources. In particular the Government fully
appreciates the decisive role of popular participation and the development of self-reliance in
these endeavors and is therefore determined to create the requisite social and political conditions
conducive to their realization (TGE, 1994).

According to TGE (1994), the Government believes that health policy cannot be considered in
isolation from policies addressing population dynamics, food availability, acceptable living

24
conditions and other requisites essential for health improvement and shall therefore develop
effective inter sectoral link for a comprehensive betterment of life. So health development shall
be seen not only in humanitarian terms but as an essential component of the package of social
and economic development as well as being an instrument of social justice and equity. Pursuant
to the above, the health policy of the Transitional Government shall incorporate the following
basic components.

According to HSDP (2010) The National Health Policy is an overarching policy document that
gives strong emphasis to the fulfillment of the needs of the less privileged rural population that
constitutes about 81.5 % of the total population in Ethiopia. The Health Policy outlines:

1. Democratization and decentralization of the health system;

2. Development of the preventive components of the health service;
3. Ensuring accessibility of health care by all population
4. Promoting inter-sectoral collaboration, involvement of the NGOs and the private sector;
5. Promoting and enhancing national self- reliance in health development by mobilizing and
efficiently utilizing internal and external resources.

Having the national health policy as an umbrella for the development of HSDP IV, other health
and health related policies and strategies have been considered. These include:

1. Policy and Strategy for Prevention and Control of HIV/AIDS

2. The National Drug Policy
3. The National Population Policy
4. The National Policy on Women
5. Child Survival Strategy
6. National Nutrition Program
7. National Strategy for the prevention, control and elimination of malaria
8. National TB prevention and control strategy
9. Development and Transformation Plan (DTP)

Hence by applying the policies mentioned the government of Ethiopia has claimed achieving a
success story in the world.

25
 CHAPTER THREE

RESEARCH METHODOLOGY
Literature has emphasized that the notion of human capital is very important in Economic
Theory. However, human capital needs to be measured quantitatively to validate theoretical
models. Yet quantitative measurement alone may not dictate the whole story of the impact of
human capital on economic growth, especially for developing countries like Ethiopia as
economic growth can be explained by many distinct factors such as the productivity and
composition of public expenditure, the socio-cultural condition of the people, the political
platform, the manner expenditures are financed and etc. In situations like this, relying on a single
method may have a danger to be noticed. However as this is a case noted in the limitation
section, only quantitative analyses are employed to address the issue of human capital formation
and economic growth. The quantitative analysis is employed for all variable proxies entered in to
the model.

Using a time series data of 42 years from 1974to 2015, this study looks at the impact of Human
capital formation on economic growth in Ethiopia, in light of the different variables used as
proxies.

3.1 DATA DESCRIPTION, SOURCES AND TOOLS

The study uses time series annual data from 1974 to 2015. Most of the data are collected from
The MOFEC, WORLD Data bank, CSA and Planning and Economic Commission of Ethiopia..

26
Table 1: Sources of data

# Variable Name Unit of Measurement Source of Data

1 Real GDP % Change in RGDP Planning and Economic
Commission
2 GCF % of RGDP Planning and Economic
Commission
3 Gov. Education Expend % of RGDP MOFEC
4 Gov. Health Expend % of RGDP MOFEC

5 Labor Force Labor force Growth World Bank Data Bank and
rate CSA
6 Inflation Inflation growth rate CSA

3.2 ECONOMETRIC MODEL SPECIFICATION

The number of methods followed in measuring and estimating human capital contributions are as
many as the number of literature works done in the area depending on context specific situations.
A relatively simple adoption is the use of the augmented Solow human-capital-growth model.
This model is an improvement on the Solow growth model. Solow’s original model did not
explicitly incorporate human capital. In order to do that, Mankiw, Romer, and Weil (1992) came
up with the augmented Solow model which incorporates human capital as a separate input in to
the model. This is due to the fact that labor possesses heterogeneous level of education, skills and
health condition which were assumed to be homogeneous in the original Solow model.

The modification in the Solow model serves the suitability and hence, the adaptation of the
model for our context. The basic assumption in this approach is that increase in workers’ quality
through improved education and health, improves output. This supports the human capital theory
which postulates that education and healthcare of workers ensure greater productivity.

The augmented Solow model using the standard Cobb Douglas production function is therefore
specified as follows:

27
  
Yt  Kt H t (AL)1  = (1)

Where

Y=Output level

K=Stock of Physical Capital

H=Level of Human Capital

L=Labor force measured by labor force growth rate

A=Level of total factor productivity

 =Elasticity of capital input with respect to output

 =Elasticity of Human Capital input with respect to output

U=is an error term

Econometric Equation

 
Yt  Kt H t ( AL)1  U (2)

Transformed in to log linear

ln Yt   ln Kt   ln H t  (1     ) ln AL  V
where V  ln U (3)

28
To further suit to the theoretical context and the relevance of this study, the model is modified
to accommodate additional variables. These variables include government’s expenditure on
education and health (capital and recurrent) and inflation. The first two variables are
incorporated as a showcase to capture government’s investment in human capital development.
The other variable captured to suit this model is Inflation. Growth is usually calculated in real
terms: that is inflation-adjusted terms to eliminate the distorting effect of inflation on the price
of goods produced.

The new expanded model is thus stated as follows.

ln Y   ln K   ln H  (1     ) ln AL  ln GovE  ln GovH  ln I  V (4)

Output level (Y) is represented by real Gross Domestic Product (RGDP); stock of physical
capital (K) is measured by the country’s Gross Fixed Capital Formation; (H) is a measure of
human capital development for which Government’s capital and recurrent expenditure on
education (GovE) and health care (GovH) are taken as proxies; (AL) is Labor force measured by
labor force growth rate expressed as a product of (A) total factor productivity. It is expected that
all other explanatory variables except labor force (as it is in the Solow’s model) would exhibit
positive relationship with the dependent variable.

3.3 MODEL ESTIMATION

This study engages in a series of six-step procedure in order to determine the relationship
between human capital development and economic growth in Ethiopia. These procedures are the
stationarity test for variables, cointegration rank of estimation, the VECM for short run
adjustment to the long run, short run causality test for the sum of the differences of the
explanatory variables, autocorrelation and residual normality tests. The Augmented Dickey
Fuller (ADF) test is employed to determine the stationarity (and hence absence of unit roots) in
the time-series data used while the Johansen co-integration test and VECM were employed to
find out the long run equilibrium convergence and the speed of disequilibrium adjustments
respectively. The short run causality tests are employed in order to see the significance of the
sums of lags of explanatory variables. Finally test for autocorrelation and residual normality
distribution is done.

29
 CHAPTER FOUR

RESULTS AND DISCUSSION

The time series data model specification and hence formulation given in chapter three is not
suitable for OLS estimation. This is because of the fact that most macroeconomic time series
contain unit roots and the regression of one non-stationary series on another is likely to yield
spurious results. The macroeconomic data for Ethiopia is not an exception in this regard. This
means, the data may not be stationary at a level I (0) and hence, we cannot run OLS Method. In
light of the above justification, before running for any time series estimation method, the data is
recommended to be checked for stationarity.

4.1 STATIONARITY TEST RESULT

The concept of "stationarity" is related to the properties of stochastic processes. Empirical work
based on time series data assumes that the underlying time series is stationary. Time series data
is assumed to be stationary if the mean, variance and covariance of the series are independent of
time and the value of the covariance between the two time periods depends only on the distance
or gap or lag between the two time periods and not on the actual time at which the covariance is
computed Gujarati (2005:797). In other words, there exists stationary process if it generates
constant mean and variance.

In order to check for stationarity, there are many tests that could be employed while the most
widely known and commonly used approach is to do the Dickey Fuller test or the ADF Test in
case of collinearity of the error terms. If a time series is nonstationary, we can study its behavior
only for the time period under consideration and hence it’s not possible to generalize it to other
time periods. That means forecasting is difficult. Hence, to check for stationarity, unit root test is
recommended.

30
4.1.1 AUGMENTED DICKEY FULLER TEST (ADF)
The Dickey Fuller Test assumes that the error term ut is uncorrelated. But in cases where uts are
correlated, the ADF is recommended to be used. This is done by “augmenting” the preceding
three equations by adding the lagged values of the dependent variable ∆Y.

Table 2: Results for stationarity test

Variable
# Name Test Statistic 5% Critical Value Condition Remark
1 Real GDP -2.587 -1.95 Suppressed Constant term Stationary
-6.428 -3.54 Trend Term Stationary
-4.867 -1.686 Drift Stationary
2 GCF -6.278 -1.95 Suppressed Constant term Stationary
-8.126 -3.54 Trend Term Stationary
-7.385 -1.686 Drift Stationary
3 Inflation -8.732 -1.95 Suppressed Constant term Stationary
-8.505 -3.54 Trend Term Stationary
-8.62 -1.686 Drift Stationary
4 Edu -2.594 -1.95 Suppressed Constant term Stationary
-5.485 -3.54 Trend Term Stationary
-4.516 -1.686 Drift Stationary
5 Health -3.582 -1.95 Suppressed Constant term Stationary
-5.496 -3.54 Trend Term Stationary
-4.947 -1.686 Drift Stationary
6 Labor Force -9.681 -1.95 Suppressed Constant term Stationary
-9.495 -3.54 Trend Term Stationary
-9.59 -1.686 Drift Stationary

Null hypothesis H0= data has unit root (non-stationary)

Alternate hypothesis H1= data doesn’t have unit root (stationary)

31
Guideline (Criteria): if absolute value of the test statistic is greater than /5% critical value/, the
criteria is to reject the null hypothesis and to accept the data as stationary and vice versa
otherwise. As can be seen from the ADF test results, all the time series are stationary at I (1)
while they are not at I (0). When all variables are integrated of the same order and in this case
with integrated at order one; it is advised that Johansen cointegration estimation method should
be used.

4.2 COINTEGRATED RANK OF VARIABLES

If two integrated variables have shown to share a common stochastic trend such that a linear
combination of these variables is stationary, they are called cointegrated. For example, the plots
of yearly ln GDP, GCF, Labor force growth rate, Education and health expenditure and inflation
in Figure 1 exhibit fluctuation at a constant mean and hence its mean is reverting and appears to
be stationary. The meaning of Cointegration mimics static or long run relationships (state of
equilibrium or static model) while short run depicts the short run disequilibrium (dynamics)

Figure 1, plots of variables

All values are in terms of birr except for labor force and inflation
10

Ln of values
5

-5
1974 1984 1994 2004 2014
Year in GC

GDP GCF
Edu Health
LF Inflation

32
4.3 OPTIMUM LAG SELECTION CRITERIA
Literature informs that there is a good number of lag-order selection criterion most commonly
used in applied work methods. However, most authors prefer the Akaike Information Criterion
(AIC) as they claim it tends to produce the most accurate structural and semi-structural impulse
response estimates for realistic sample sizes. In light of this understanding, we have chosen AIC
determined a maximum lag length period of four.

Guideline: The lower the AIC value, the better will be the model all the time.

Table 3: Lag selection criterion

. varsoc gdp gcf edu health lr inf

Selection-order criteria
Sample: 1978 - 2015 Number of obs = 38

lag LL LR df p FPE AIC HQIC SBIC

0 -59.4109 1.3e-06 3.44268 3.53467 3.70124

1 95.5937 310.01 36 0.000 2.5e-09* -2.82072 -2.17675* -1.01076*
2 125.169 59.15 36 0.009 4.0e-09 -2.48256 -1.28662 .878797
3 172.94 95.543 36 0.000 3.3e-09 -3.10212 -1.3542 1.81064
4 224.937 103.99* 36 0.000 3.8e-09 -3.94404* -1.64414 2.52012

Endogenous: gdp gcf edu health lr inf

Exogenous: _cons

4.4 THE JOHANSEN COINTEGRATION ESTIMATION

The Johansen test can be seen as a multivariate generalization of the augmented Dickey-Fuller
test. The generalization is the examination of linear combinations of variables for unit roots. The
Johansen test and estimation strategy (maximum likelihood) makes it possible to estimate all
cointegrating vectors when there are more than two variables. If there are three variables each
with unit roots, there are at most two cointegrating vectors. More generally, if there are n
variables which all have unit roots, there are at most n – 1 cointegrating vectors.

Based on Johansen, S. and Juselius, K (1990), studies, it is suggested that the Johansen test for
Cointegration is to be used when

 All Variables are non- stationary at level I(0) and

 All Variables are stationary at first differenced I (1) and not I(2) and beyond.

33
While the use of differenced variables will avoid the spurious (nonsensical) regression problem,
it will also remove any long-run information. In modeling time series data, it is suggested to
retain the long-run information but to ensure that it reflects the co-movement of variables due to
the underlying equilibrating tendencies of economic forces, rather than those due to common but
unrelated time trends in the data.

By the long run we refer to the state of equilibrium where there is no inherent tendency to change
since economic forces are in balance while the short run depicts the disequilibrium state.

Since we already have identified that our variables are not stationary at I(0) and stationary at
I(1), we can simply run the Johansen cointegration model in order to see the possible long-run
equilibrium relationships, i.e. co-integration and we can estimate how many “cointegrating
vectors” exist among the variables using the Johansen’s technique.

4.6 ESTIMATION OF JOHANSEN TEST FOR COINTEGRATION

Table 4: Cointegration rank

. vecrank gdp gcf edu health lr inf, trend(constant) lags(4) max

Johansen tests for cointegration

Trend: constant Number of obs = 38
Sample: 1978 - 2015 Lags = 4

5%
maximum trace critical
rank parms LL eigenvalue statistic value
0 114 136.1994 . 177.4746 94.15
1 125 174.98623 0.87015 99.9009 68.52
2 134 201.64566 0.75417 46.5820* 47.21
3 141 215.04082 0.50590 19.7917 29.68
4 146 222.95831 0.34079 3.9568 15.41
5 149 224.87735 0.09607 0.1187 3.76
6 150 224.93669 0.00312

5%
maximum max critical
rank parms LL eigenvalue statistic value
0 114 136.1994 . 77.5737 39.37
1 125 174.98623 0.87015 53.3189 33.46
2 134 201.64566 0.75417 26.7903 27.07
3 141 215.04082 0.50590 15.8350 20.97
4 146 222.95831 0.34079 3.8381 14.07
5 149 224.87735 0.09607 0.1187 3.76
6 150 224.93669 0.00312

34
H0: Null hypothesis =there is no cointegration

H1: Alt hypothesis= there is cointegration

Guideline: if the trace statistic is greater than the critical value (5%), reject the null hypothesis
and accept the alternative hypothesis

4.7 INTERPRETATION OF THE JOHANSEN ESTIMATION

As can be seen from the above Johannsen cointegration estimation results, we have two
cointegrating equations from a maximum of 5 (n-1). At a null hypothesis of 0 cointegration
equation, the trace statistic result of 177.4746 is greater than the value 94.15 at 5% critical value
(95% confidence level). The guideline in this case is to reject the null hypothesis and in return
accept the alternative hypothesis until the converse is true. At a null hypothesis of 2
cointegration equations, the trace statistic result of 46.5820* is less than the 5% critical value i.e,
47.21. Based on the guideline, if the trace statistic value is less than the critical value, the
decision will be accepting the null hypothesis with two cointegration equations.

4.8 THE VECM

VECM adjusts to both short run changes in variables and deviations from equilibrium. Variables
that are individually non-stationary may be co-integrated. In this regard, stationarity test is done
individually to all variables and all variables in the model are to have unit roots (non-stationary)
at level I (0) and are expected to become stationary at I(1). Using the Johansen con-integration
method, it was found that two cointegrated equations are in the model. Hence, use of VECM
model is suggested. In this model, the equation is differenced and an error-correction term
measuring the previous period’s deviation from long-run equilibrium is included

35
4.8.1. VECTOR ERROR -CORRECTION MODEL
Table 5: Vector error correction model

Vector error-correction model

Sample: 1978 - 2015 No. of obs = 38

AIC = -3.560298
Log likelihood = 201.6457 HQIC = -1.505723
Det(Sigma_ml) = 9.91e-13 SBIC = 2.214348

Equation Parms RMSE R-sq chi2 P>chi2

D_gdp 21 .072346 0.9246 196.2278 0.0000

D_gcf 21 .186257 0.7020 37.68525 0.0140
D_edu 21 .129386 0.8632 100.9602 0.0000
D_health 21 .18509 0.8060 66.48906 0.0000
D_lr 21 .096381 0.8680 105.2064 0.0000
D_inf 21 .954324 0.7382 45.11893 0.0017

36
4.9 SHORT RUN ADJUSTMENT

Table 6: Coefficient of cointegration

Coef. Std. Err. z P>|z| [95% Conf. Interval]

D_gdp
_ce1
L1. -.3535758 .149226 -2.37 0.018 -.6460535 -.0610982

_ce2
L1. -.5310597 .1399631 -3.79 0.000 -.8053824 -.2567371

gdp
LD. -.7292734 .2733354 -2.67 0.008 -1.265001 -.1935458
L2D. -.3000777 .2659779 -1.13 0.259 -.8213848 .2212295
L3D. -.2004791 .2294778 -0.87 0.382 -.6502474 .2492891

gcf
LD. .2742723 .1359247 2.02 0.044 .0078648 .5406799
L2D. .2621779 .1065401 2.46 0.014 .0533632 .4709926
L3D. .1611141 .1235839 1.30 0.192 -.0811059 .403334

edu
LD. -.3473086 .1584263 -2.19 0.028 -.6578184 -.0367988
L2D. -.403941 .1795063 -2.25 0.024 -.755767 -.052115
L3D. -.2996645 .2092594 -1.43 0.152 -.7098054 .1104764

health
LD. .1607293 .1191173 1.35 0.177 -.0727364 .394195
L2D. -.0035244 .1010567 -0.03 0.972 -.2015918 .1945431
L3D. .0484592 .13266 0.37 0.715 -.2115496 .3084681

lr
LD. .1493885 .2192702 0.68 0.496 -.2803732 .5791503
L2D. -.0642222 .1671384 -0.38 0.701 -.3918074 .263363
L3D. -.0496386 .1239926 -0.40 0.689 -.2926597 .1933824

inf
LD. -.0173576 .0243208 -0.71 0.475 -.0650254 .0303103
L2D. -.0020714 .019569 -0.11 0.916 -.0404259 .0362831
L3D. .0160045 .0146344 1.09 0.274 -.0126784 .0446873

_cons .0446604 .0255059 1.75 0.080 -.0053303 .0946511

4.9.1 INTERPRETATION OF THE VECM

Guideline: when the error correction term is significant (0.05) and the sign is negative there is
long run equilibrium or loosely speaking causality running from the explanatory variables to the
dependent variable in this case to Real GDP. The ideal situation in the long run equilibrium is to
have a negative coefficient of cointegration equation with significant p value. The estimation of

37
VECM in table 6 shows there are two cointegrating equations with both negative coefficient of
variables with P values less than 5%. Hence the model is judged to have a short run adjustment
to the long run equilibrium running from the independent variables to GDP

4.9.2 INTERPRETATION
There is a long run equilibrium (causality) running from the dependent variable Real GDP to all
the explanatory variables since the error correction term is negative and P value is significant.

This means that Ce1 and Ce2 explain the model is adjusting itself at the rate of 35 % and 53%
towards the long run equilibrium respectively. This is certainly a significant and stable
correction. What this means in other terms is, the coefficient of the speed of adjustments imply
that 35% and 53% of the disturbance in the short run will be corrected each year. In other words
negative coefficients greater than unity and significant meaning, the system corrects its previous
period disequilibrium at the indicated speed to reaching its long run equilibrium steady state
position.

4.9.3 SHORT RUN (SINGLE AND JOINT CAUSALITY OF LAGS)

Hereunder, we discuss the short run causality of the differenced individual lag of explanatory
variables and that of their sum at a maximum lag order running from the explanatory variables to
the dependent (target variable ) GDP. The results of all variables except health, labor force
growth rate and inflation are consistent with predictions.

The result of the first lag of GDP, GCF and Education expenditures show statistically significant
figure. That means, there is a short run causality running from these variables to GDP.

Short run causality test for Real GDP

As can be seen from the test statistics, there is a short run causality running from lags of GDP to
GDP which is consistent to theories and our predictions that lags of GDP may Granger cause

itself
38
Short run test for GCF

As can be seen from the test statistics result above, there is short run causality running from lags
of GCF to GDP which is again consistent to theories and our predictions. Hence, the test result
shows that the ever expanding infrastructure and physical investments in various part of the
country can be explained by a short run impact that it has in the country’s economic growth.

Short run causality test for education

Human capital formation is theoretically related with the development of educational sector
which inter alia comprises the quality as well as numeric components (expansion of education).
As can be seen from the test statistics results, there is short run causality running from lags of
government expenditure on education to GDP which is again consistent to theories and our
predictions. Hence, the test result shows that the government’s spending on educational sector
can be explained by a short run impact that it has in the country’s economic growth.

39
Short run causality test for Health

One of the paradoxical and inconsistent results to theories and to our predictions is that of government
expenditure on health. It appears that the sum of the differenced lags of health has insignificant
contribution to the country’s economic growth. However, its impact on economic growth in the long
term may have contributed to the existence of long run equilibrium. The contribution of health in
economic growth and wellbeing of the labor force is something under studied in the Ethiopian context
and it is much attributed to economic development than economic growth.

. test ([D_gdp]: LD.health L2D.health L3D.health)

( 1) [D_gdp]LD.health = 0
( 2) [D_gdp]L2D.health = 0
( 3) [D_gdp]L3D.health = 0

chi2( 3) = 2.44
Prob > chi2 = 0.4865

Short run causality test for labor force growth rate

The traditional national income theory uses labor as one factor of production on which national income
depends. In our case, the labor force growth rate is insignificant in the short run economic contribution,
which can be explained by the fact that mere increase in labor force may not increase output. This is
consistent at some point to the Augmented Solow Model predictions and again to theories of
demography. In Solow’s model, while investment in physical capital may affect growth positively,
population growth does it negatively. However, depending on the population structure of a nation labor
force growth might have insignificant contribution to increase in national income.

. test ([D_gdp]: LD.lr L2D.lr L3D.lr)

( 1) [D_gdp]LD.lr = 0
( 2) [D_gdp]L2D.lr = 0
( 3) [D_gdp]L3D.lr = 0

chi2( 3) = 2.39
Prob > chi2 = 0.4959

40
Short run causality test for inflation rate

Theoretically, high inflation is consistent with low rates of unemployment, implying that there is a
positive impact on economic growth. However, most of the time the inflationary rate in Ethiopia is
artificial and one that may not be explained by economic attribute. Sometimes the inflationary
measures are government policy measures. In any case, the test statistic shows that inflation rate is
found to be insignificant.

Table 7: Cointegrating equations

Cointegrating equations

Equation Parms chi2 P>chi2

_ce1 4 959.7433 0.0000

_ce2 4 707.6168 0.0000

Table 8: Johansen Normalization

Johansen normalization restrictions imposed

beta Coef. Std. Err. z P>|z| [95% Conf. Interval]

_ce1
gdp 1 . . . . .
gcf 0 (omitted)
edu .0336967 .209857 0.16 0.872 -.3776154 .4450089
health -.7235025 .2167351 -3.34 0.001 -1.148296 -.2987095
lr -2.574039 .3892895 -6.61 0.000 -3.337032 -1.811045
inf .0893591 .0577195 1.55 0.122 -.0237691 .2024873
_cons -14.9592 . . . . .

_ce2
gdp -1.11e-16 . . . . .
gcf 1 . . . . .
edu -1.126329 .1840218 -6.12 0.000 -1.487005 -.7656528
health .5022924 .1900532 2.64 0.008 .129795 .8747897
lr 2.580913 .3413646 7.56 0.000 1.911851 3.249976
inf -.1873616 .0506138 -3.70 0.000 -.2865628 -.0881605
_cons 2.802937 . . . . .

41
Table 9: Results for Test of Autocorrelation

Lagrange-multiplier test

lag chi2 df Prob > chi2

1 29.8753 36 0.75412
2 30.3920 36 0.73204
3 41.2353 36 0.25234
4 37.2759 36 0.41019

H0: no autocorrelation at lag order

Our lag selection criteria dictated us to choose lag 4. At lag 4, the p value is 0.41019; which is
greater than 5%. The decision in this case is to accept H0 (there is no autocorrelation). Hence we
accept the null hypothesis. Again in all the lags above the p value is insignificant. As such we
have no autocorrelation problem and we can judge that the model is free from autocorrelation
problem.

Test for residual normal distribution

H0: the residuals are normally distributed

H1: the residuals are not normally distributed

Table 10: Results for residual normal distribution

. vecnorm, jbera

Jarque-Bera test

Equation chi2 df Prob > chi2

D_gdp 0.761 2 0.68351

D_gcf 1.302 2 0.52145
D_edu 2.046 2 0.35955
D_health 0.073 2 0.96392
D_lr 2.072 2 0.35488
D_inf 0.722 2 0.69689
ALL 6.977 12 0.85914

42
Ho: Residuals are normally distributed.

H1: Residuals are not normally distributed.

In order to see the normality distribution of the residuals, the Jarque Bera test is used. As can be
seen from the test result, residual distribution of all variables for all models shows that the
distribution is normal. Results for all the variables shows that the p value for all variables is
greater than 5% and hence we can say that the model is free from the a problem of non-normality
distribution of the residual (error) terms.

43
 CHAPTER FIVE

CONCLUSION AND RECOMMENDATION

5.1 CONCLUSIONS

In this study I have examined the impact (formation) of human capital on economic growth in
Ethiopia using a time series data running from 1974 to 2015. Some econometric empirical
inferences such as stationarity, cointegration and the long run diagnostic tests were employed to
grasp the nature of time series data. The results of the long run model revealed that there is a
long run equilibrium to which short run dynamic adjustments of 35% and 53% are justified
looking at the two cointegrating equations respectively. Hence one of the main finding is that
there is a long run equilibrium to which short run adjustments are statistically significant and
stable. Three variables such as RGDP, GCF and government expenditure on education are found
to have a statistically significant effect on real gross domestic product in the short run and they
are the main contributors to RGDP. On the other hand, government expenditure on health, labor
force growth rate and inflation rate are shown to have statistically insignificant impact on
economic growth which is paradoxical and not consistent to theories and predictions.

Though a huge economic contribution as in that of developed economies like USA is not
expected Hippe (2003), due to partly data management and partly institutional capacities , there
is however a growing and consistent evidence that both the health and education components of
human capital are contributing to the economy.

5.2 RECOMMENDATIONS
It is a question to be answered and empirically supported as to whether the government’s recent
expansionary approach on education sector and the resultant spending on education have
contributed to its short and long run economic aspiration while quality issues and the debate on
the level of measurement being something to be answered. Health is also a sector which has
gaining a lot of attention in recent times from the government and it is wise to see its
contribution in the long and short term periods. The spending on education and GCF have shown
to have significant effect on economic growth in the short run and it’s the recommendation of
this paper that policy makers do continue the injection of money on these sectors while concerns

44
being raised on qualities seeking due attention. The spending on public health has shown to have
a statistically insignificant result at least in the short run and it is the recommendation of this
paper that policy makers should be cautious on health spending. Further investigation of health
contribution should be recommended to be analyzed. That means policy makers and / or the
government should strive to create health sector institutional capacity that improves basic health
service in a cost efficient way. The study also further recommends that the current accelerated
and sustained growth aspirations in infrastructure and other capital developments are in line with
several studies focusing on physical capital developments. In general the policy makers and the
government should focus on securing more resources and structures that are essential and
appropriate for better and efficient basic health service provision. Such measures apart from
focusing on creating new institutional capacity, they should further strengthen and change the
existing institutional setups of the education and health sectors of Ethiopia that produce quality
manpower.

45
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Appendix 1-Data in ln

All variables except Labor Force GR and Inflation are expressed in Millions of Birr
Year Real GDP GCF Edu Expend Health Expend Labor F GR Inflation
1974 8.6364566 9.86141478 5.084672311 3.835573833 -3.52860005 2.370243741
1975 8.7267593 9.67193373 5.03624456 4.000400116 -3.752596553 1.547562509
1976 8.8671657 9.64257723 5.03627705 4.192529394 -3.364958803 2.939161922
1977 8.9092353 9.55506418 5.003603965 4.253767036 -3.087089955 3.086486637
1978 9.0506578 9.73861291 5.211244169 4.271234729 -3.364846263 2.923161581
1979 9.0081936 9.92588485 5.301392633 4.310664888 -3.364991497 2.564949357
1980 9.173806 9.99332826 5.430047137 4.570992734 -3.753544277 2.525728644
1981 9.2895476 10.002201 5.642126905 4.695741884 -3.610659946 0.641853886
1982 9.3867516 9.98192898 5.744185181 4.656148431 -3.221969355 1.987874348
1983 9.2753788 10.2400669 5.810500069 4.705467907 -3.752671587 1.360976553
1984 9.4458077 9.68452276 5.913078591 4.801887623 -3.404532738 -
1985 9.5835774 10.2055162 5.956093813 4.833579847 -3.333195801 2.797281335
1986 9.5396441 10.2870478 6.037823186 4.992063909 -3.18702596 1.871802177
1987 9.5956028 10.557062 6.103345757 5.041099835 -3.528612659 -
1988 9.6638017 10.2110458 6.1834765 5.133501684 -3.364845973 0.832909123
1989 9.7156508 10.1070812 6.205704579 5.161466184 -3.495101441 2.261763098
1990 9.8169955 9.8875614 6.193782748 5.078169324 -3.459281895 1.648658626
1991 9.9824308 9.726452 6.270008746 5.241164835 -3.40324906 2.995732274
1992 10.204755 10.2759817 6.540153713 5.544356795 -3.327467982 3.086486637
1993 10.242628 10.3567582 6.904731713 5.855902523 -3.382483164 2.041220329
1994 10.44778 10.4901069 7.032383279 6.064180479 -3.345753656 1.193922468
1995 10.503755 10.617809 7.231914882 6.177861123 -3.369814827 2.595254707
1996 10.659962 10.6704659 7.281041489 6.370277624 -3.543024265 -0.105360516
1997 10.677241 10.6647839 7.323533688 6.464276729 -3.50822059 -
1998 10.839821 10.7107221 7.439988124 6.458918053 -3.4773157 1.360976553
1999 10.824079 10.6943965 7.393719014 6.343757404 -3.497376855 1.458615023
2000 11.097202 10.8345881 7.687980668 6.591906901 -3.204904241 1.686398954
2001 11.117673 10.9630991 7.901305341 6.668698278 -3.302909918 -
2002 11.095825 10.8585181 8.236472962 6.79317461 -3.271178286 -
2003 11.194134 11.1646438 8.400427888 6.7307436 -3.259391385 2.388762789
2004 11.359775 11.1657906 8.417968038 7.26196218 -3.264622238 1.987874348
2005 11.565661 11.3272342 8.742371608 7.217766197 -3.271603181 1.808288771
2006 11.777854 11.305003 8.939984661 7.158046962 -3.507838634 2.360854001
2007 12.045203 11.4177793 9.211519676 8.132882737 -3.491158031 2.76000994
2008 12.41242 11.5170768 10.07190939 8.996770843 -3.466255141 3.230804396
2009 12.713072 11.7196713 10.31767134 9.088135449 -3.434796349 3.594568775
2010 12.845646 11.8558341 10.6051183 9.413577499 -3.407188779 1.029619417
2011 13.152075 12.1109594 10.85368593 9.462637983 -3.375326498 2.895911938
2012 13.524257 12.2066825 11.09726525 9.70164734 -3.368345091 3.529297384
2013 13.672703 12.5489032 11.2499156 10.0521502 -3.363835305 2.602689685
2014 13.874558 12.908277 11.45072133 10.35022703 -3.368045367 2.028148247
2015 14.076305 13.1454638 11.72818333 10.61779232 -3.31061542 2.261763098

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