AN EVALUATION OF THE IMPACT OF HUMAN CAPITAL FORMATION AND UTILIZATION ON ECONOMIC GROWTH IN NIGERIA

TABLE OF CONTENTS
Declaration……………………………………………………………………………………………………………………………….
Certification……………………………………………………………………………………………………………………………………………
Dedication……………………………………………………………………………………………………………………………………………..
Acknowledgement……………………………………………………………………………………………………………………………….
Table of contents…………………………………………………………………………………………………………………………………..
List of Tables…………………………………………………………………………………………………………………………………………
List of Figures………………………………………………………………………………………………………………………………………..
List of appendices………………………………………………………………………………………………………………………………….
Abstract………………………………………………………………………………………………………………………………………………
CHAPTER ONE – GENERAL INTRODUCTION………………….……………………………………………………………
1.1 Background to the study………………………………………………………………………………………..……..
1.2 Statement of problem………………………………………………………………………………………….……….
1.3 Research questions……………………………………………………………………….……………………….………
1.4 Objectives of the study………………………………………………………………………………………………
1.5 Null Hypotheses……………………………………………………………………………………….……………………
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1.6 Scope and limitations…………………………………………………………………………………………………..
1.7 Justification for the study…………………………………………………………………………………………….
1.8 Organization of the study……………………………………………………………………………………………
CHAPTER TWO- LITERATURE REVIEW …………………………………………………………….……….……………
2.1 Concept of human capital……………………………………………………………………………………………
2.2 Measurement of human capital……………………………………………………………………………………
2.3 Growth theories…………………………………….……………………………………………………………………
2.4 Empirical literature………………………………………………….……………..…………………………………
2.5 Theoretical Framework…………………………………………………………………………………………..…
2.6 Development of Latent Human capital Index………………………………………………………………
CHAPTER THREE- RESEARCH METHODOLOGY…………………………………………………………..…………
3.1 Model Specification………………………………………………………………….…………………………….…..
3.4 Human capital accumulation approach……………………………………..……………………….………..
3.5 Stock or level of human capital approach……………………………………………………………………
3.6 Disaggregated model………………………………………………………………………………………..…………
3.8 Estimation Techniques………………………………………………………………………………………………….
3.9 Unit Root…………………………………………………………………………………………………………………….
3.10 Cointegration……………………………………………………………………………………………….……..…..…
3.11 Data type and sources…………………………………………………………………………..……………………
CHAPTER FOUR- DATA PRESENTATION AND DISCUSSION………………………………..………………….…..
4.0 Presentation and interpretation of empirical results……………………………………………..………
4.1 Trends in human capital formation and utilization in Nigeria………………………………….……
4.2 Long run relationship between human capital and economic growth in Nigeria……………
4.3 Shocks and Variations in economic growth and human capital innovations…………….…..
4.4 Summary major of finding………..…….…………………………….………………………………………….…
CHAPTER FIVE- SUMMARY, CONCLUSIONS AND RECOMMENDATIONS………….…………………
5.1 summary……………………………….……………………………………………………………………………………
5.2 Conclusion……………………………………………….…………………………………………………………………
5.3 Recommendations………………………………..…………………..……………………………………………….
References…………………………………………………………………………………………………………………………
Appendices……………………………………………………………………………………………………………………….

CHAPTER ONE
GENERAL INTRODUCTION
1.0 Background to the Study
The Nigerian economy has remained under-developed for many years and has
continued to remain so despite the country’s abundance of human and natural
resources. In the 1960s and early 1970s, Nigeria, Malaysia, Indonesia, Taiwan,
Singapore and South Korea had similar incomes per capita, GDP growth rates, and
under-developed political structures. Today, the “Asian Tigers” (as they are
popularly known) have escaped under-development and poverty because of the
way in which their economies have been managed and are now excelling
economically and technologically due to heavy and sustained investments in
human capital development. On the other hand, the growth performance of the
Nigerian economy has been slow. Available data show that the economy grew at
the rate of 7.5 per cent between 1970 and 1997. It decline to a rate of 0.5 per
cent between 1980 and 1987. There was improvement to a rate of 5.6 per cent
between 1988 and 1991. The economy again nose-dived and decline to a rate of 3
per cent between 1992 and 2001. From 2003 to 2007, the growth performance
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has improved with an average growth rate of 6 per cent. Similarly, there has been
low response of human development to trends in economic development. Human
development has remained unimpressive in Nigeria as shown by the human
development indices which have consistently been among the lowest in the world
since 1980. The World Bank 2006 Human Development Report placed Nigeria in
the 154th position out of 179 countries. Nigeria’s performance does not compare
favorably to levels achieved in many other developing countries. For example,
Malaysia is ranked 59, Thailand 76, Tunisia 92, South Africa 119, India 127 and
Ghana 131. A basic interpretation of this is that, Nigeria is only better off than 27
countries in the measurable human development indices (HDI) and by implication
in the quality of life of citizens. Some of the factors responsible for the low
response of human development to economic growth may be found in the
structure of production and nature of growth. The underlying structure of the
economy has not been allowed to experience structural transformation.
Subsistence agriculture is still widely practiced. According to UNDP (2009) more
than 50 per cent of the labor force is still working in the agricultural sector, which
means that Nigeria’s labor force is largely unskilled. The growth of agricultural
output has been disappointing. Available data indicate that growth in the
agricultural sector remained at 5.8% between 1990 and 1993 but declined to 1.8%
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during the period 1999 to 2001. During the period 1999-2001, agricultural GDP
showed an average growth rate of 2.6%. The growth rate portrayed by this sector
is disturbing, given the fact that it employs about 50% of the nation’s labor force
and the availability of vast and rich arable land all over the country. As Akingbade
(2006) put it, the agricultural sector must grow between 7% and 10% in order to
have any meaningful impact on poverty reduction. The performance of the
industrial sector was also unsatisfactory. Available data show that between 1990
and 1992, growth in the sector stood at 2.1%. Between 1993 and 1995, growth
was 1.3%. However, between 1999 and 2001 growth rose to 6.1%. The slow
growth in industrial production was mirrored in the sluggish growth in the key
sub-sectors. For the period 1993 to 2005, the growth of manufacturing stood at
8.4%, mining sub-sector grew by 7.4% during the period 1999 and 2010, perhaps
as a result of increased activity in the solid minerals sub-sector. The disappointing
performance of manufacturing is serious especially as manufacturing is expected
to be an “engine of growth” of the economy. Manufacturing capacity utilization
which averaged 75% in the mid-1970s, declined sharply to below 50% from 1983
and by 1995 it had reached a low of about 29%. In 1999, capacity utilization in
manufacturing was about 30%, rising to about 40% in 2010. This marginal
improvement, however, was not enough to contribute to increase real output in
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the economy. There is no doubt that expansion of manufacturing in Nigeria has
been constrained by a series of factors, such as: high cost of domestic production
due to the high cost of investible funds and power/energy etc. The oil sector
generates more than 90 per cent of the foreign exchange earnings and funds at
least 80 per cent of the federal budget, yet employs just 1 per cent of the labor
force with low forward and backward linkages within the economy (UNDP, 2009).
Therefore, the growth associated with the agricultural, manufacturing and oil
sectors has not resulted in any significant restructuring or transformation of the
economy as they were not seriously linked to the real sector. The result is that
Nigeria was unable to maximize the benefits associated with its human capital
potentials. It is generally believed that human capital plays a significant role in the
functioning of an economy because human beings are the most-prized assets of a
nation. Other factors of production such as land, unskilled labor, financial and
physical capital are combined with skilled human resources to create wealth.
Countries of the world such as Singapore and Malaysia etc that have realized the
importance of human capital have invested heavily in it. No nation can achieve its
full potentials without skilled human resources. Technical innovations that have
occurred in the developed countries and a few developing countries are a product
of human capital development. The key objective of human capital formation is
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the transformation of the social, political, economic and technological life of the
society. It increases the capacity of people to do productive work and serve as
agents of national growth and development. Governments desire to reverse the
present situation and propel Nigeria as the 20th largest economy requires
sustained human capital development and utilization.
1.2 STATEMENT OF THE PROBLEM
In response to myriads of problems such as declining quality of
education/relevance, under-employment, low absorptive capacity, shortage of
professionals, and brain-drain, a number of policy and reforms initiatives were
undertaken to improve human capital formation and utilization in Nigeria. These
included the National Policy on Education 1977 revised in 1981, 1998 and 2004,
the Universal Basic Education (2004), the Dakar framework for Action/Education
for All (1990), the Millennium Development Declarations and Goals (2000) and
the National Economic Empowerment and Development strategy (NEEDS, 2005).
Public spending on education and health has also risen steadily between 1981 and
2007. CBN annual reports (1981-2007) revealed that public expenditure on
education as a proportion of gross domestic product (GDP) rose from an average
of 1.5 per cent between 1981 and 1991 to an average of 3.3 per cent between
2001 and 2007. Despite the rising trends of investment in education, Nigeria’s
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share for education diverges sharply from regional and international norms. For
instance UNESCO World Education Report 2000 indicates that for 19 other
countries in Sub- Saharan Africa, education expenditure average 5.1% of GDP.
This implies Nigeria’s funding efforts and its budgetary priority for education is
lower than that of Sub Saharan Africa. Similarly, between 1981 and 2007, health
expenditure as a percentage of GDP, in Nigeria, grew by a mere 1 per cent. The
impact of reforms in health sector is slow as indicated by major healthcare
indicators in Nigeria. According to the midpoint assessment of the Millennium
Development Goals (2008), infant mortality rate decline from 91 per 1000 in 1990
to 86 per 1000 in 2007. Maternal mortality ratio has worsened from 700 in 1990
to 800 in 2007. Access to basic sanitation remains static from 39 in 1990 to 42.9 in
2007. Access to safe drinking water has worsened from 54 in 1990 to 49 in 2007.
From the foregoing, investment in human capital formation has remained
inadequate and has slowdown attainments of the objectives of national
development and those of the Dakar framework for Action/Education for All
(1990), and the Millennium Development Declarations and Goals (2000).
Therefore, the process of human capital formation has remained unimpressive
because of the myriads of problems such as quality/relevance of education and
the ability of increased investment in human capital to stimulate growth and
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development may be hindered because of the dysfunctional process of human
capital formation and utilization in Nigeria. According to Garba (2003), the
dysfunction has created and sustained great divides between theory and practice,
between formal and informal skills and knowledge forming and using centre, and
between local and foreign components which constitute formidable obstacles to
Nigeria’s development process. This may explain the sluggish growth of the non
oil sectors of the economy. Similarly, human capital utilization in Nigeria has not
been impressive. This is because employment growth rates failed to keep pace
with expansion in economic activities. According to the National Bureau of
Statistic’s annual abstract of statistics (2006) growth rates of employment were
2.75%, 2.75%, 4.46% 2.55%, 3.11%, 5.74% and 3.25% for the years 2001, 20002,
2003, 2004, 2005, 2006 and 2007 respectively compared to growth rates of real
GDP of 4.6%, 3.50%, 9.57%, 6.58%, 6.51%, 6.03%, and 6.22% for the same
periods. The trend show that when the country experienced sustained growth
rates, employment responded rather sluggishly. This is because the value addition
in the real sector has been limited and so has been the employment effect. Also
available data National Bureau of Statistics (2008) revealed that
underemployment rate is significantly high. Underemployment rate was 20.2% in
2006. Similarly, growth during this period has not resulted in appreciable decline
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in unemployment. Unemployment figures continue to rise. Unemployment rose
from 12.6% in 2002 to 19.7% in 2008. The presence of these problems in spite of
the various policy formulation and response requires detail empirical analysis.
1.3 RESEARCH QUESTIONS
In attempting to address the research problems above, the following research
questions have been answered:
1. To what extent has the trends in human capital formation and utilization
impacted on economic growth in Nigeria?
2. Why has the growth performance in Nigeria been weak despite the
various investment and policy measures undertaken?
1.4 OBJECTIVES OF THE STUDY
The broad objective of this study is to examine different channels through
which human capital affect long run economic growth in Nigeria both at the
aggregated and disaggregated levels for various sub-sectors of the economy.
The specific objectives are to:
a) To examine trends in human capital formation, utilization and economic
growth in Nigeria
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b) To examine the long run relationship between human capital and growth
at the aggregate and disaggregated levels of the Nigerian economy.
c) To examine the extent to which shocks and variations in growth at the
aggregate and disaggregated levels are explained by human capital
innovations.
1.5 NULL HYPOTHESES
The following sets of null hypotheses were tested:
1. There is no significant relationship between human capital and economic
growth in Nigeria.
2. There is no long run relationship between human capital and economic
growth in Nigeria.
3. There is no long run relationship between human capital and growth in
agricultural, manufacturing and service sectors of the economy.
4. There is no significant difference in the effects of shocks and variation in
human capital innovations on economic growth in Nigeria at the aggregate
and disaggregated levels.
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1.6 SCOPE AND LIMITATIONS
This dissertation covers the period between 1981 and 2007. The period enables
the researcher to assess the impact of the policy and subsequent human capital
development on economic growth. But, due to the lack of published data on
human capital and the inadequacies of the proxies used to measure human
capital, we followed established practice for measuring an unobservable variable
using the latent index variable approach to estimate a human capital index using a
multi-variable approach. Another limitation is the problem of missing
observations on some variables that were filled using linear- interpolation.
1.7 JUSTIFICATION FOR THE STUDY
Human capital is increasingly believed to play an important role in the growth
process. However, adequately measuring its stock remains a major challenge. In
Nigeria, measuring human capital remains a major challenge. Several studies in
the country have investigated the relationship between human capital and
economic growth using various human capital measures. For instance, Adamu
(2003) used recurrent and capital expenditure for education, Chete and Adeoye
(2003) used total expenditure on education and health, Uwatt (2003) used
enrolments in education at primary, secondary and tertiary as measures for
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human capital while Otu and Adenuga (2006) used both capital and recurrent
expenditure on education and enrolment rates in educational institutions to
measure human capital. The measures of human capital used in the above studies
are fraught with problems. School enrolment rate is a poor measure of the stock
of human capital because enrolment is a flow measure rather than a stock
measure of human capital. Hence, school enrolment only capture part of the
continuous accumulation of the stock of human capital, also current enrolments
are not indicators of the schooling level of current labor force but the future labor
force. Therefore, school enrolment rates do not accurately reflects future flows of
the human capital stock, let alone current flows or the current stock itself. In
addition, measures such as literacy rates, capital and recurrent expenditure on
education and health are also fraught with problems for several reasons: first,
they are poor indicators of education quality, secondly, they ignore factors other
formal education that impact on skill formation. Thirdly, they evolve in correlation
with other macroeconomic variables that introduces endogeneity or reverse
causality biases in estimation (Cohen and Soto 2007; Krueger and Lindahi, 2001).
Based on the aforementioned gaps identified in these studies, this Dissertation
makes a modest contribution to literature by developing a new multi-dimensional
index of human capital as a latent factor using factor analysis. The choice of the
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human capital index is based on two factors. Human capital is too rich to be
captured by a single variable. Secondly, given the scarcity of valid instruments, the
unobserved latent factor approach provides a solution to endogeneity and
measurement error problems (Flossmann, Piatek and Wichert 2006). To come up
with a better measure that included more information and to determine whether
indicators of human capital have a multidimensional character, we employ Factor
Analysis to estimate the following measures as a human capital index: enrolment
rates at primary, secondary and tertiary levels, public expenditure on education
and health, per capital scientific publications in science (SciP), per capita capital
equipment (Ke), and per capita high technology exports (Xm); and the labour
force. The development of the instrument is a major contribution to growth
empirics in the country given the scarcity of valid instruments.
Secondly, this Dissertation is important because it addresses other gaps
identified in literature. Empirical evidence from the aforementioned studies on
Nigeria suggests the researchers focus on analyzing the relationship between
human capital and economic growth at the aggregated level. The Dissertation
contributed to literature by extending the analysis to the disaggregated level in
order to examine the impact of human capital on growth in the agricultural,
manufacturing and service sectors of the economy. This has become necessary
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because of the disappointing growth trends recorded in agricultural and
manufacturing sector of the economy.
1.8 ORGANISATION OF THE STUDY
This research dissertation is organized into five chapters. Chapter one is the
general introduction and it includes: the background to the study, problem
statement, research objectives, the hypothesis to be tested, scope and limitation
as well as outline of chapters, and justification for the study, chapter two reviews
the conceptual, theoretical and empirical literature on human capital and growth
theories, chapter three presents the methodology of the study, while chapter four
presents and discuss econometric results of the impact of human capital on
economic growth at both the aggregated and disaggregated level. Finally chapter
five contains the summary, conclusions and recommendation of the dissertation,
as well as suggestion for further research. They are followed by the bibliography
and list of tables.