How financial development and economic growth influence human capital in low-income countries

Abstract

PurposeThis research aims to explain the effect of financial indicators and economic growth on human capital in low-income countries.Design/methodology/approachWe gathered balanced panel data from 1980 to 2016 over a sample of 12 low-income countries categorized by World Development Indicators. The data stationary properties were analyzed by unit root test while the existence of a long-run relationship among the variables was confirmed by cointegration test. We performed Hausman test to differentiate between the fixed effect and random effect model. The sensitivity analysis confirmed the robustness of the results.FindingsOur findings indicated that broad money supply and private sector credit has a positive and significant impact on human capital. Interestingly, bank credit showed a negative and significant effect on human capital. We also found a significant positive relationship between human capital and economic growth in the study sample.Originality/valueThis is a preliminary study using financial development and human capital in low-income countries with panel econometric techniques as an analysis tool. Overall, we suggest a policy to focus on the financial sector development and economic growth to produce sustainable human capital.