Human Capital Development And Economic Growth In Nigeria; An Empirical Analysis

Project and Seminar Material for Economics

Human Capital Development And Economic Growth In Nigeria; An Empirical Analysis


This study examined and analyzed the impact of human capital development on economic growth in Nigeria, using time series data of 32 years spanning 1980 to 2012, data utilized for the study were extracted from secondary sources i.e. journals and publications, CBN and NBS. The Ordinary Least Square Regression technique was used to estimate the parameters of the model. Empirical results show that human capital development, in line with theory, exhibits significant positive impact on output level.

This implies that human capital development is indispensable in the achievement of sustainable economic growth in Nigeria, as there is an increase in economic performance for every increase in human capital development. Based on the estimated regression and a descriptive statistical analysis of trends of government commitment to human capital development, it was found that the development of the human component of resources of Nigeria is crucial to economic growth and hence the urgent need for the Nigerian government to increase the funding of education and health, as this will result to a rapid growth of the Nigerian economy.

Chapter One


1.1 Background of the Study

Education and health are basic objectives of development; they are important ends in themselves. Health is central to well-being, and education is essential for a satisfying and rewarding life; both are fundamental to the broader notion of expanded human capabilities that lie at the heart of the meaning of development (Todaro and Smith, 2011).

No country has achieved sustained economic development without substantial investment in human capital. The role and importance of human capital in propelling the pace of economic growth cannot be overemphasized. The development of human capital has been recognized by economists to be a key prerequisite for a country’s socioeconomic and political transformation. Therefore, human capital is considered as the most valuable asset and needs to be mobilized, developed and empowered to participate fully in all socio-economic activities. To do this, it is first of all required that the stock and mix of human capital in the country be assessed based on the outcome of this assessment, plans are put in place to develop the required manpower to fill the existing gaps while provisions are made for future needs.

It was opined by Adedeji and Bamidele (2003) that the generally agreed causal factors responsible for the impressive performance of the economy of most of the developed and the newly industrializing countries is an impressive commitment to human capital formation. This has been largely achieved through education and training by all the people of these countries. It is important to know that human capital, which gained reasonable attention, started with seminar papers two decades of the last century. It has refined to highlight its endogenous contributions to the growth process (Romer, 1996, 1990; Lucas, 1998). Therefore, all developing countries were advised to invest in human capital formation of which Nigeria also participated. Nigerian government did not only start training people in schools, but formulated educational policies in relation to primary, secondary and tertiary institutions towards making education workable in Nigeria. Nigeria has come a long way in her development planning efforts. A major component of the development planning process is the effect in human capacity building through education and training.

Neither classical nor neoclassical authors on economic growth gave much attention to the role of human capital as one of the sources of growth. In contrasts, other authors, for example, Mankiw et al (1992) postulated later that there is a significant relationship between investment in human capital and economic growth. In theory, since human capital is related to knowledge and qualifications, and since economic growth depends on the progress of technological and scientific knowledge, it is reasonable to expect that growth is a function of human capital. The human capital development paradigm focuses on the development of human capabilities such as enhanced knowledge and skills as well as improved health.

It is also concerned with how people acquire knowledge and utilized it in the production process. The approach further operates and ensures that the needs of people are not only the opportunities to form capabilities, but also the opportunities to utilize them. This is due to the realization that human potentials will be wasted where the efforts of human development fails to balance the formation and use of human capabilities. In a nutshell, the human development strategy entails that the fruits of economic growth and development must be translated into improved and expanded choices in the lives of people, increasing both their capabilities and opportunities (UNDP, 2001).

It has been stressed that the differences in the level of socio economic development across nations is attributed not so much to natural resources and endowments and the stock of physical capital but to the quality and quantity of human resources. According to Oladeji and Adebayo (1996), human capital resources are a critical variable in an economy growth process and worthy of development. They are not only means but, more importantly, the ends that must be saved to achieve economic growth and progress. This is underscored by Harbinson (1973), who posited that “human resources constitute the ultimate basis for the wealth of nations. Capital and natural resources are passive factors of production human being are the active agents who accumulate capital, exploit natural resources, build social, economic and political organizations, and carry forward national development. Clearly a country which is unable to develop the skills and knowledge of its people and to utilize them effectively in the national economy will be unable to develop anything else”.

Nigeria has been involved in planning to develop the country since her independence. But the strategy has been emphasizing heavily on the accumulation of physical or material capital to the detriment of human capital in the quest for rapid socio-economic progress. However, previous development strategies which virtually ignored the social or human aspect of development did little to alleviate the pace of development in the country. However, since 1990 when the United Nations Development (UNDP) started publishing the human development report year after year, the human development pathway to development began to gain grounds in many countries including Nigeria. The 1999 UNDP human development report on Nigeria highlighted the over arching problem of poverty in the country.

The report noted that no meaning policies or programme for the alleviation of poverty can be successfully developed in the country outside the framework of a holistic sustainable human development paradigm (UNDP, 1999). The federal government of Nigeria, perhaps in response to the 1999 UNDP report on the country, seems to have now embraced the philosophy of human development strategy as evidenced in its declare guiding principles in the 1999-2003 economic policy document “the economy exists for and belong to the people and at all times the general well-being of all people shall be the over-riding objectives of the effort”.

In more recent times, renewed attention was paid to the role of human capital formation in the country’s development process and this has prompted the federal government to declare in its 1999-2003 economic policy programme that “the economy exists for and belongs to the people, and at all times the general objectives of the government and the proper measure of performance” (FGN, 1999). This policy statement of the government is furthered reiterated in the National Economic Empowerment and Development Strategy (NEEDS). The provision of high quality education and health care to all the country’s citizen is considered a key element of public policy by all levels of government.

In the same regard, the National Economic Empowerment and Development Strategy (NEEDS, 2004 – 2007) document stated that NEEDS is about the Nigerian people. Their welfare, health, employment education, political power, physical security and empowerment are of paramount importance in realizing their vision (Nigeria, 2004. p11). Also, Nigeria along with other 191 member countries of the United Nations Organizations (UNO) subscribed to the attainment of the Millennium Development Goals (MDGs) by the year 2015. These MDGs are salient to human capital development as they are geared towards reducing poverty, ill-health and educational deprivation.

The 2010 Human Development Index (HDI), values for Nigeria was 0.423 placing her in the 142nd position among 169 countries with comparative data, whereas Ghana ranked 130 with HDI value of 0.467 while South Africa placed 110 with HDI, value of 0.597. In three broad categories of; high, medium and low human development, Nigeria was grouped among the countries considered to have low human development (UNDP. 2010).

Human capital formation is a prerequisite for Nigeria and Nigerians to become competitive in the 21st century globalized economy which is knowledge based. A country’s competitiveness in the New International Economic Order (NIEO) is strongly connected to human capital. Hence human formation is undoutbly the pivot for any meaningful programme of socio-economic development of Nigeria and indeed of any country. Highly skilled and flexible human capital is essential to compete effectively in today’s world and is a key building block of a knowledge based economy. Such human capital encourages nations to adopt, adapt, use and produce knowledge ad to become central to its development. All levels of education have their role to play; primary education is the foundation for life long learning (Cutz, 2006).

According to a World Bank Report of 1996 titled, “Nigeria, poverty in the midst of plenty” Nigeria presents a paradox, the nation itself is rich but is inhabited by poor people. Human condition in Nigeria have greatly deteriorated, resulting to large scale poverty as population growth has outripped the rate of food production. The existing social services, the quality of nutrition, education and health services have deteriorated. The challenge for Nigeria according to Umo, (1995) is not one of improving one sector, but to adopt growth and social services oriented programme or policies that will enable all its inhabitants to improve their welfare such policies would switch public expenditure towards those that emphasize the development of human capita, such policies could result in rapid development of social indicators and under pin the formulation of necessary policies for rapid and sustained growth. This implies the development of her human resources which invariably is human capital development.

Human capital investment has been identified by scholars to entail the process of acquiring and increasing the number of persons who have the skills, education and experience which are critical for the economic and political development of a country.

There are five ways of developing human resources (Shultz. 1991):‑

  1. Health facilities and services, broadly conceived to include all expenditures that affect the life expectancy, strength and stamina.
  2. On the job training, including old type of apprenticeship organized by firms.
  3. Formally organized education at the elementary, secondary and the higher levels.
  4. Study programme for adults that are not organized by firms, including extension programme notably in agriculture
  5. Migrating of individuals and families to adjust to changing job opportunities.

In its widest sense, investment in human capital means expenditure on healthcare, education and social services in general. It is increasingly recognized that the growth of tangible capital stock depends to a considerable extent on human capital for a nation which is the “process of increasing knowledge, the skills and all capacities of all the people of the country”.

Studies made by Schultz, Harbison, Dension, Kendrich, Abramouth, Becdar, Bowman, Kuznets and a host of other economists reveals that one of the important factors responsible for the rapid growth of the American economy has been the relatively outlays in education. They said that a dollar invested in education brings a greater increase in national income than a dollar spent on dams, factors of production or other tangible capital goods. In Gabraith’s words “we now get the larger part of our growth not from more capital investment but from investment on men and improvement brought about by improved men”. Earlier economists like Adam Smith, Veblen, and Marshal stressed the importance of human capital in production.

Less developed countries (LDCs) are characterized by economic backwardness which manifests itself in low labour efficiency, factor mobility, limited specialization in occupation and in trade, a deficient supply of entrepreneurship and customary values and tradition social institutions that minimize the incentives for economic change. The slow growth in knowledge is an especially severe restraint on programme. To remove economic backwardness and instill the capacity and motivations progress, it is necessary to increase the knowledge and skills of the people. In fact, without an improvement in the quality of human factor no progress is possible in an under developed country.

Investment in human capital is also required to raise the general living standards of the people in LDCs. This is possible when education and training make fuller and rational utilization of surplus manpower by providing larger and better jobs opportunities in both rural and urban areas. These in turn, raise incomes and living standards of the people. Therefore, economists are of the view that it is the lack of investment in human capital that has been responsible for the slow growth of less developed countries (LDCs) such as Nigeria.

1.2 Statement of the Problem

Recognition had been made of no significant economic growth by any country without adequate development of her human capital. In the past, much of the planning in Nigeria was catered on the accumulation of physical capital for rapid growth and development without recognition of the important role played by human capital in the development process. The Human Development Index provides a composite measure of three dimensions of human development, namely health, education and income; living a long and health life (measured by life expectancy), being educated (measured by adult literacy and education of primary secondary and tertiary levels) and having a decent standard of living (measured by purchasing power parity and income). Data obtained are combined into an index, on a scale of 0 – 1 with the following subdivisions; high human development (0.8-1.0), medium human development (0.5-0.7) and low human development (0.0-0.49) (UNDP, 2010).

Nigeria scored on the 2010 Global Competitiveness Index (GCI) was 3.38 which gave her a rank of 127 out of the 139 countries surveyed. Furthermore, National Average per capital income suing purchasing power parity (PPP) method, in Nigeria 2010 was a mere US $900 compare to $2,190 in Ghana and $10,290 in South Africa with the corresponding ranks of 139,157 and 74 for Nigeria, Ghana and South Africa respectively. In 2010, life expectancy in Nigeria was 48.4 years, below that of Ghana of 57.1 years South Africa at 52 years.

Public spending on social service such as education and health care that are critical to human capital development is generally low in Nigeria. the country’s budgetary allocation to education is still a far cry from the United Nation Education, Scientific and Cultural Organization (UNESCO) recommendation of 26% of the national budget which is to be spent on education by member countries. The outcome of the low spending on education is the continued decline in educational opportunities and standard in the country. The health sector in Nigeria is likewise in a state of parlous decay. Budgetary allocation to health as a proportion of the national budget fluctuated between 2.70% and 7.00% from 1999 to 2010 (Federal Ministry of Finance, 2010). The country’s health sector was ranked 191 among 201 countries surveyed by the World Health Organization (WHO) in 2010. However, it is obvious that only a healthy population can be fully productive as health care is not only health producing by also wealth producing. The foregoing is indicative that human capital in Nigeria is severely under-developed. Based on these problems, this study seeks to examine human capital as the key to Nigeria economic growth and development.

In the light of the problem therefore, this study seeks to proffer answers to the following questions:

  1. Does human capital development impact on economic growth in Nigeria?
  2. Does government expenditure on education have significant effect on economic growth in Nigeria?
  3. Does government expenditure on health have significant effect on economic growth in Nigeria?
  4. Does the level of school enrollment have significant effect on economic growth in Nigeria?
  5. Does the level of infant mortality rate have significant effect on economic growth in Nigeria?
  6. Does life expectancy have significant effect on economic growth in Nigeria?

1.3 Objectives of the Study

The major objective of this study is to examine human capital as a key to Nigeria economic growth and development. Other secondary objective of this study will be:

  1. To examine the impact of human capital development on economic growth in Nigeria.
  2. To assess the impact of government expenditure on education and economic growth in Nigeria.
  3. To assess the impact of government expenditure on health and economic growth in Nigeria.
  4. To investigate the impact of infant mortality rate on economic growth in Nigeria.
  5. To examine the impact of life expectancy on economic growth in Nigeria.

1.4 Hypotheses of the Study

The following hypothesis were put forth for this study:

  1. Ho: Human capital formation has no impact on economic growth in Nigeria
    Ho: Government expenditure on education does not have significant impact on economic growth in Nigeria
  2. Ho: Government expenditure on health does not have significant impact on economic growth in Nigeria
    Ho: The level of school enrollment does not have significant effect on economic growth in Nigeria.

1.5 Significance of the Study

This study will reveal the level of human capital investment in Nigeria, both in terms of the government financial outlays on education and health, and the actual resultant effect in terms of the actual school enrollment and the level of infant mortality rate as proxies for education and health respectively. It has been observed that investment in human capital contributes in numerous ways to the development of a general milieu favourable to economic progress. Apart from the extension of human capabilities.

If there were inefficient management or utilization of existing human resources, the quest to achieve economic growth would be more and more elusive with lapse of each day as they were. In recognition of the above, this study intends to carry out a detailed study on the current state of the nation’s human resource development and will also serve as a reference material for research purposes on human capital investment and economic growth in Nigeria. as this study will be useful to policy makers, economists, health and education experts, students and other stakeholders.

1.6 Scope of the Study

This study will make use of quarterly time series data for this period 1975-2013. As emphasis will be centered on human capital investment in terms of government expenditure on education and health, school enrollment.

1.7 Limitations of the Study

One of the unending problems plaguing developing countries is the non-availability of research data. Nigeria is not an exception to this problem. Data limitation is as a result of restricted access to data banks, fluctuating communication network which particularly made this research study source data through secondary sources whereas in uniqueness of research study, several research centers would be been visited.

Time and cost is also a constraining factor as this study was done alongside other academic engagement. All these, thus pose as a limitation to the effective execution of this study.

1.8 Structure of the Study

The study has been organized in five chapters, with chapter one dealing with the introduction; and chapter two is an exercise in the review of relevant literature. Chapter three and four deals with the model specification and empirical analysis respectively. Finally, findings, recommendations and conclusion are taken care of in chapter five.

Chapter Five

Summary, Recommendations and Conclusion

5.1 Summary of Findings

The essence of this study is to empirically investigate the impact of human capital development on economic growth in Nigeria. The investigation was carried out to ascertain the extent of commitment o the Nigerian government to developing of the human component of development. This was necessary because human capital is sacrosanct for any nation or economy wishing to achieve development as fast as it could as there can be no meaningful economic growth without adequate human and natural resources. Human capital which is the stock of competences, knowledge and personality attributes embodied in the ability to perform so as to produce economic value.

Reviewing several literatures, it was established that investment in human capital (education and health) is a crucial determinant of the growth process of both developed and developing countries. It was found that well educated people are more innovative and easily adapt to technology thus, improving the efficiency of physical capital and the productivity of the society. In otherwords, investment on human capital by the government is strongly and positively correlated with economic growth.

To examine the relationship that exist between human capital development and economic growth, a trend analysis of the dependent and independent variables was carried out. Also, an econometric methodology of the ordinary least square (OLS) was estimated for our model. Furthermore, appropriate evaluation technique was utilized for our test of significance. The findings based on the estimated model was that gross fixed capital formation (GFCG)impact negatively on economic growth because this had a negative coefficient and was significant at the 5% level of significance. Secondary school enrollment (SSE) was found to impact on economic growth positively as this pass the significance test even at 2%. However an important finding was on government expenditure on education and health (GEEH). The GEEH was found to impact positively on economic growth as this passed the significance test even at 3%. Hence a unit increase in government expenditure on education and health will increase economic growth by 1.023 units.

5.2 Recommendations

Based on the findings of this empirical study, the following recommendations are proffered:

Firstly, there is an urgent need to increase the funding of the educational sector in Nigeria. Since education involves the development of human potentials, it deserves to be made paramount in Nigeria. This will be of great benefit if Nigeria is to grow and develop economically and for the total transformation of the Nigerian economy.

Secondly, the health system should be well funded. It was discovered that the health system in Nigeria seriously deteriorating, as this makes development impossible to achieve. Hence, apart from the funding, efforts should be geared towards establishing maintenance culture on the existing health facilities.

Thirdly, government should place a high premium on human capital development through adequate provision of basic education including primary and post primary education. The secondary school enrollment was found to be highly significant in enhancing economic growth. Efforts at improving posit primary education will spur the literacy level and hence increase the number of secondary school enrollment and thus propelling the economy to higher levels of productivity.

Fourthly, the government should seriously embark on policies that would encourage technical education and training in the country. At present, the country’s educational system produces more of liberal arts based graduates than science and technology based graduates. An increase in science and technology based graduates will enhance the technical know how of the workforce in the country.

Fifthly, it has been observed that government has been pumping funds into improving human capital by investing heavily on education and health but this has not yielded an impact because they have not reached the targeted session of the economy because of the attitude of emphasizing input rather than output/outcome in government planning.

Sixthly, corruption and political instability is another bane in the process of augmenting the human component of development. Government officials usually siphoned funds meant to develop the economy. Furthermore, educational activities usually shut to a halt whenever the political environment is in crises e.g. war. Hence government should put machinery in place to reduce the level of corruption and sustain a stable political environment.

Lastly, government should conscientiously fund research and development (R & D), for this will introduce new ideas in the economy, which are needed for development. R & D will help acquaint the people with-breaking modern technologies in the productive sectors of the economy. This will improve the quality of goods and services produced in the country and make them competitive in the global market, as well as increasing the nation’s foreign exchange earnings.

5.3 Conclusion

This study has attempted to establish the empirical linkage between investment in human capital and economic growth in Nigeria. From the findings, it has become glaring that Nigeria’s effort at development could be hampered by the non availability of human resources both in quantity and quality. The constraint, obviously, would serve as a restraint to effective prosecution of the nation’s development programmes. The poor state for the country’s human capital was as a result of poor funding of the education and health sectors by successive administrations since independence in 1960. For education to contribute significantly to development and be sustained, it must be of high quality to meet the skill-demand needs of the economy. Education is highly instrumental and even necessary to improve the production capacity of any nation, especially Nigeria.

We thus recommend that if Nigeria must attain the objective of growth and development programmes, it must, of necessity give prior attention to the development its citizens. There is also a call for a reform of the education and health sector as such reform policies and programmes must target attaining increased stake-holding, extended partnerships and collaboration in educational development. Education policy formulation, planning, implementation, funding and quality assurance should as much as possible involve all key stakeholders including the private sector, the communities and the civil society. Furthermore, this study does not wholly exhaust the quest for any other research in the way in which human capital impact on economic growth.

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