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Interactive effects of human capital in finance–economic growth nexus in Sub-Saharan Africa

Muazu Ibrahim (Department of Banking and Finance, School of Business and Law, University for Development Studies, Wa, Ghana)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 12 November 2018

566

Abstract

Purpose

The purpose of this paper is to examine the interactive effect of human capital in financial development–economic growth nexus. Relative to the quantity-based measure of enrolment rates, the main aim was to determine how quality of human capital proxied by pupil–teacher ratio influences the relationship between domestic financial sector development and overall economic growth.

Design/methodology/approach

Data are obtained from the World Development Indicators of the World Bank for 29 sub-Saharan African (SSA) countries over the period 1980–2014. The analyses were conducted using the system generalised method of moments within the endogenous growth framework while controlling for country-specific and time effects. The author also follows Papke and Wooldridge procedure in examining the long-run estimates of the variables of interest.

Findings

The key finding is that, while both human capital and financial development unconditionally promotes growth in both the short and long run, results from the interactive terms suggest that, irrespective of the measure of finance, financial sector development largely spurs growth on the back of quality human capital. This finding is also confirmed by the marginal and net effects where the interactive effect of pupil–teacher ratio and indicators of finance are consistently huge relative to the enrolment. Statistically, the results are robust to model specification.

Practical implications

While it is laudable for SSA countries to increase access to education, it is equally more crucial to increase the supply of teachers at the same time improving on the limited teaching and learning materials. Indeed, there are efforts to develop rather low levels of the financial sector owing to its unconditional growth effects. Beyond the direct benefit of finance, however, higher growth effect of finance is conditioned on the quality level of human capital. The outcome of this study should therefore reignite the recognition of the complementarity role of human capital and finance in economic growth process.

Originality/value

The study makes significant contributions to existing finance–growth literature in so many ways: first, the auhor extend the literature by empirically examining how different measures of human capital shape the finance–economic growth nexus. Through this the author is able to bring a different perspective in the literature highlighting the role of countries’ human capital stock in mediating the impact of financial deepening on economic growth. Second, the author makes a more systematic attempt to evaluate the relative importance of finance and human capital in growth process while controlling for several ancillary variables.

Keywords

Acknowledgements

The author of this paper has not made their research data set openly available. Any enquiries regarding the data set can be directed to the corresponding author. The author is grateful to the reviewers and the Editor-in-Chief, Professor Mohsen Bahmani-Oskooee and Asongu A. Simplice (PhD) for their comments on the manuscript. The usual caveats apply.

Citation

Ibrahim, M. (2018), "Interactive effects of human capital in finance–economic growth nexus in Sub-Saharan Africa", Journal of Economic Studies, Vol. 45 No. 6, pp. 1192-1210. https://doi.org/10.1108/JES-07-2017-0199

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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