The Stages of Human Capital and Economic Growth: Does the Direction of Causality Matter for the Rich and the Poor?

This paper empirically examines the intricate link between human capital and economic growth using panel data from 90 countries over the period 1970–2010 by employing a panel vector VAR approach under system GMM estimates. The paper visits the issues of feedback and composition effects which put a growing skepticism on the empirical studies evaluating the role of education on economic growth. The physical capital accumulation is also included into the analysis to deal with the omitted variable bias. The findings of the paper reveal that there are different linkages between human capital and economic growth for developing and OECD countries for the different stages of human capital formation. While secondary and tertiary education have predictive power for economic growth, economic growth does not predict human capital accumulation in the developing countries. In the OECD countries, the evidence indicates that tertiary education, which is the source of technological progress, promotes economic growth. On the other hand, results suggest that education spurs growth and in turn growth improves human capital formation in high income OECD economies. Findings are also supported by different lag orderings and different estimation techniques.