The Role of Human Capital in Finance-Growth Nexus: Panel Data Analysis of African Countries

While the individual role of human capital accumulation and financial sector development are well accounted for in both theoretical and empirical economic growth literature, there are not many studies that emphasize the joint significance of these two important economic growth covariates, especially within the African context. Bridging this knowledge gap is not just important for academic literature but also imperative for policy. This study relies on a novel broad-based composite indicator of financial development to tease-out the role of human capital in the finance-growth nexus using data for 44 African countries from 1991 to 2020. The study uses the Panel Smooth Transition Regression (PSTR) method as its main technique and systems GMM interaction specification for robustness test.

Our findings from the GMM show that human capital when interacted with financial institutions and market development, boosts economic growth.  This effect is more pronounced when human capital is measured as life expectancy than when measured in secondary enrolment. Our results from the PSTR estimations show that an adequate level of human capital development is needed for financial development to promote economic growth in African countries, with a threshold value of 85 (35) for secondary enrolment (life expectancy) measures of human capital development.  Therefore, African countries should increase access to education and improve life expectancy of population to catalyze the impact of financial development on economic growth. The outcome of this study should, therefore, reignite the recognition of the complementary role of human capital and finance in the economic growth