The Impact Of Human Capital On Economic Growth In Nigeria (1975-2015)

Project and Seminar Material for Economics

Project and Seminar Material for Economics


A nation cannot experience economic growth without human capital. And for human capital to actually have any impact on economic growth some investments have to be made. Investment in human capital consists of; investment in education, training, health and other social services that will help in enhancing the productive capacity of labour. This project examines the impact of human of capital on economic growth in Nigeria from 1975-2015. The study used the ordinary least square technique (OLS) to determine the relationship between human capital and economic growth. The research result shows that foreign direct investment does not have much impact on economic growth while human capital which was proxied by total government expenditure, labourlife expectancy and stock of physical product, and their impact on economic growth.

Comparing Nigeria to most countries we can see that the rate of investment in human capital is low. Therefore in order to increase its formation and thereby accelerate economic growth, much attention should be paid to expenditure on education, health and other socio-economic infrastructure that will enhance the productivity of labour. Attempts should be made t restructure the educational system too meet the challenges of the society. The government should furthermore try to ensure a stable macroeconomic environment that will encourage increased investment in human capital by private bodies, religious organization and individuals.

Chapter One

Background To The Study

The concept of human capital is a relatively recent idea in the realm of economic theory. While economists have long paid close attention to the concept of investments in physical capital in recent years they have placed emphasis on the concept of human capital investments. Largely, this shift occurred as a result of the failure of classical economist’s theory to explain the dominance of developed countries over undeveloped ones in the international market. Human capital covers a broad range of concepts but the most essential feature is increased productivity through investing in employees, it can mean education acquired from elementary school level, training of basic reading and writing skills, to job training, both of general and specific skills.

The use of the term human capital in the modern neoclassical economic literature dates back to Jacob Mincer pioneering article “Investment in Human Capital and Personal income distribution” in the Journal of Political Economy in 1958. And the best known application of the idea of ‘Human Capital’ in economics revolves around the work of Mincer, Schultz and Gary Becker of the Chicago school. Becker’s book entitled Human Capital published in 1964 became a standard reference for many years. According to Gary Becker; Human Capital is similar to “physical means of production”( example factories and machineries) one can invest in human capital (via education, training and medical treatment) and one’s income depends partly on the rate of return on the human capital one owns, which allows one to receive a flow of income which is like interest earned. Human capital is substitutable though it will not replace land, labor or capital it can be substituted for them to various degrees and be included as a separate variable in a production function.

Human capital can also be defined as a way of defining and categorizing people’s skills and abilities as used in employment and otherwise contribute to the economy. It is also used to refer to the skills and knowledge intensity of the labor force in an economy which are essentially acquired through schooling and training.

The organization and economic co-operation and development define human capital as “The knowledge, skills competences and attributes embodied in individuals that are relevant to economic activity” (Schuller 2001) while duration of schooling and levels of qualification are the standard measures.

Laroche et al (1999) further extend this notion to include “innate abilities”. Innate abilities are;

  • They are not part of the physical body and there is therefore no chance of double counting.
  • They can not be separated from such things in human capital such as experience.

Nakamura (1981) also defines human capital broadly as labor skills, managerial skills and entrepreneurial and innovative abilities plus such physical attributes as health and strength.

Newland and San Segundo (1996) see human capital as that ability and education of an individual and on the other hand as the costs of physically raising a child and health.

Human capital refers to a conscious and continuous process of acquiring requisite knowledge, education, skills and experiences that are crucial for the rapid economic growth of a country (Harbison 1973, Salleh 1992). It involves investment in education, training and other social services like transport facilities and housing. Underdeveloped countries are faced with two diverse manpower problem; they lack the critical skills needed for the industrial sector and have a surplus labor force. The existence of surplus labor is to a considerable extent due to the shortage of critical skills and these problems are interrelated.

The need for investment in human capital formation in such economies is more obvious from the fact that despite the massive imports of physical capital they have not been able to accelerate their growth rate because of the existence of undeveloped human resources although growth of course is possible from the increase in the conventional capital even though the available labor force is lacking in skills and knowledge growth rate will be seriously limited without the latter. Human capital is then needed to staff and expand government services to introduce new system of land use and new methods of agriculture, it develops new means of communication to carry forward industrialization and to build the educational system.

People are the most important asset a nation can have and there can not be any form of economic development if the people don’t develop themselves.

When we talk about human capital the capital being referred is the one embodied in human beings that yield income and other useful outputs over long period of time it could be schooling, a computer training course, expenditure of medical care and lectures on the virtues of punctuality and honesty are also capital. This is because it raises earnings, improve health, or add to a person’s good habit over much of his lifetime.

The expenditures on education, medical care and so on are called investments in human capital; they are called human capital because people cannot be separated from their knowledge, skills health or values in the way that they can be separated from their financial and physical effect (Gary Becker 1964).

We can therefore say that it is those innate abilities and various skills acquired by a person that makes up his capital. Due to this factor there can be no significant economic growth in any economy without adequate human and natural resources. The stock of human capital like the stock of natural and physical capital will deteriorate and decay if not increased and maintained through improvements in public health and sanitation, social welfare services, good nutrition and guaranteed employment schemes. The human capital formation indices should be integrated into the planning process in order to achieve a sustainable growth and development.

The importance of human capital formation can be seen in the Khartoum declaration of 1998 which asserted that,

…The human dimension is the sine qua non of economic recovery … No SAP or economic recovery programme should be formulated or can be formulated or can be implemented without having at its heart detailed social and human priorities. There can be no real structural adjustment or economic recovery in the absence of the human imperative (Adedeji et al 1990).

Yesufu (2000) as cited in ‘Impact of Human Capital on Economic Growth in Nigeria: An error correction approach opines that “The essence of human resources development becomes one of ensuring that the work force is continuously adapted for and upgraded to meet the new challenges of its total environment”.

This is because the economy is a dynamic entity, which is constantly changing in response to various stimuli such as introduction and discovery of new techniques of production.

Okojie (1995) as cited in ‘the impact of human capital on economic growth in Nigeria: an error correction approach concludes that human capital formation “is thus associated with investment in man and his development as a creative and productive person “. The totality of the effort and cost involved in this massive upgrading of the productive capacity of the people constitutes investments in human resources, which is also referred to as manpower development or human resources development. Human capital can be acquired and developed in different ways namely; education, training, health promotion, as well investment in all social services that influences mans productive capacities including, telecommunications transport and housing. In the words of Yesufu (2000) as cited in ‘the impact of human capital on economic growth in Nigeria: an error correction approach “education and training are generally indicated as the most important direct means of upgrading the human intellect and skills for productive employment”.

However human capital formation transcends mere acquisition of intellectual ability through formal education system to include the family, the educational system ,formal or informal institutions, special professional and training organizations; enterprise in- house arrangements, and even individual self efforts.

For a nation to be termed or described as developed it must have the following characteristics and according to (Todaro2003) these are;

  1. To raise levels of living including, in addition to higher incomes, the provision of more jobs, better education and greater attention to cultural and human values all of which will serve as not only to enhance material well being but also to generate greater individual and natural self esteem.
  2. To increase the availability and widen the distribution of basic life sustaining goals such as food, shelter, health and protection.
  3. To expand the range of economic and societal choices available to individuals and nations by freeing them from servitude and dependence not only in relation to other people and nation states but also to the forces of ignorance and human misery.

If these three objectives are anything to go by then we can rightly say that Nigeria is still underdeveloped and exhibiting the characteristics of a low -income developing country this includes low levels of living, low per-capita national income, income inequality, poverty etc.

Nigeria can be categorized as a country that is primarily rural, depends on primary product, exports, has high population growth, suffers from widespread poverty and rising unemployment and must deal with tribal and ethnic conflicts. Since the advent of Nigeria’s independence in 1960 it has experienced ethnic, regional and religious tensions, magnified by the significant disparities in economic and educational development between the south and the north.

Nigeria’s social indicators placed it among the poorest in South Saharan Africa with a human development index of 0.401 was ranked 137th among 174 developing countries considered in 1993(Odusola 1998). Infant mortality rate was about 144 per 1000 live births in 1981 (Odusola 1998).

The performance of the economy has not been satisfactory, from 1980s using conventional indices. The periods 1960-65, 1970-75, 1976-80, 1981-85 and 1986-92 are very significant and they represent important episodes in the economy. The 1960-65 period attempts to capture both the independence and the commodity export boom at that time. The period 1970-75 reflects the era of oil windfall while 1976-80 period incorporates part of the oil boom and austerity measures and various stabilization packages finally, the period represents the structural adjustment years.

The oil boom and the consequent neglect of agriculture in the 1970s and early 1980s caused a massive movement of people from rural to urban centers. Moreover regional and income disparities are among the worst in the world (Todaro 2003).

For Nigeria to turn the tides of its economic misfortune and mismanagement, which includes a high rate of unemployment, poverty, illiteracy and so on, it will have to take steps to raise domestic food production and labor productivity; use oil revenues more rationally to diversify economic activity and reduce the burden of its’ foreign debt; lower population growth through a combination of effective family planning programme

Improved rural health and education and a reduction in absolute poverty: seek increased foreign aid and investment, including significant debt relief (which was achieved recently): make greater use of market price incentives to allocate resources while endeavoring to improve public and private decision making and maintain political stability between rural ethnic and religious groups (Todaro2003).

All these can rightly be achieved through human means and therefore the role of human capital to economic growth cannot be overemphasized and the development of human capital has bee recognized to be an important prerequisite and an invaluable asset for a country’s socio-economic and political transformation. Over the years, with the large population, Nigeria has not been able to do much in terms of economic development and poor leadership was blamed for the nation’s underdevelopment. This brings about the question; does the large human resource available not able to affect economic growth? The answer to this question is clear in the sense that most countries which are less populated then Nigeria has done relatively well in economic good. Taking the case of Japan for example, it was a highly populated country that was able to harness its large human resource and transform the country into a developed one. In the view of the fact that populated countries can still achieve economic growth, this study is embarked upon to assess the impact of human capital on economic growth in Nigeria.

1.2 Statement Of The Problem

“There can be no significant economic growth in any country without adequate human capital development. In the past, much of the planning in Nigeria was centered on the accumulation of physical capital for rapid growth and development, without recognition of the important role played by human capital in the development process”. This view was expressed by Ogujiuba and Adeniji (2003) in their paper economic growth and human capital development: the case of the Nigerian. They are of the view that people are a country’s most valuable assets. Going by this view, investment in human capital in terms of education, on-the –job training and health will surely raise productivity in Nigeria. Much is still to be desired in educational and health sector of the economy as we have seen that investment in human capital was the triggering factor that led to the economic growth in other developed countries.

In the light of this, the following questions and more will need to be answered in order for human capital to take its place in the growth process and planning horizon of Nigeria these questions include:

  1. How strong and significant will an increase in investment in education have on the economy.
  2. Does education and health have any link in the increase in productivity?

1.3 Objectives Of The Study

This study is aimed at examining empirically the effect of human capital on economic growth and the objectives of the study include;

  1. To ascertain the impact of education on economic growth in Nigeria.
  2. Does openness to trade and human capital promote faster economic growth?
  3. To make policy recommendations based on the findings of the research.

1.4 Significance Of Study

The significance of this study on the impact of human capital on economic cannot be over emphasized as the result will help in policy making. The study is to help come to a solution on how to accelerate economic growth.

1.5 Research Questions

The questions this research tends to answer includes amongst others the following;

  1. Does education have any impact on economic growth?
  2. Does the labour force available in a country have any impact on economic growth?
  3. Does domestic capital have any effect on economic growth?

1.6 Research Hypothesis

Based on the research work being carried out; the hypothesis is stated below;

  • H0: The determinants of human capital have no significant impact on the economic growth
  • H1: The determinants of human capital have significant impact on the economic growth

1.7 Research Methodology

The technique of estimation to be used to determine the impact of human capital on economic will be the ordinary least square technique. The model to be used will be expressed in cobb-douglas production function and the variables in the model will be logged.

1.8 Sources Of Data

For the purpose of this project, data will be sourced from the central bank statistical bulletin for the various years and the data are all secondary data.

1.9 Scope Of The Study

There are various investments that can be made in order to contribute to the formulation of human capital. But investment in education has been chosen. The scope of the study will cover the year 1975-2015 and it will be restricted to the Nigerian economy.

1.10 Outline Of Chapters

This project is divided into five chapters, after the introductory chapter, chapter two reviews some relevant literature on human capital and economic growth. Chapter three, deals with the theoretical framework and methodology. Chapter four will deal with the analysis of the regression result and finally chapter five will summarize, recommend and conclude the study.

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