An investigation of the relationship between human capital development and economic growth in Nigeria: A principal component analysis based human capital development index

Abstract

The Nigerian government has, over the years, invested significantly and increasingly in education, vocational training, skills acquisition, and health to develop its human capital as a strategy for boosting the growth of the Nigerian economy. Consequently, we investigated the relationship between human capital development and economic growth in Nigeria using annual data from 1990 to 2023. We employed principal component analysis to generate an index for human capital development from six indicators. Our findings are based on the Toda-Yamamoto Granger causality test and the Autoregressive Distributed Lag (ARDL) techniques. Human capital development has a significant positive influence on economic growth in both the short and long run. Similarly, trade openness and fixed capital formation significantly increase economic growth in the short and long term. Financial development exhibits a negative and significant effect on economic growth in the short run, while its long-run effect is positive but statistically insignificant. In the short run, human capital development and trade openness have persistent positive effects on economic growth. The Granger causality test results reveal that economic growth exhibits a bidirectional causal relationship with human capital development, trade openness, and financial development. Additionally, human capital development has a bidirectional causal association with fixed capital formation and trade openness. Based on these findings, we provide important policy recommendations to enhance Nigeria's economic growth through targeted investments in human capital and financial sector reforms.