THE ROLE OF HIGHER EDUCATION FOR ECONOMIC GRAWTH (IN ETHIOPIA)

A SENIOR PROPOSAL SUBMITTED TO THE DEPARTMENT OF ECONOMICS IN

PARTIAL FULFILLMENT OF THE REQUIREMENT OF “BA” DEGREE IN
ECONOMICS

DEBRE MARKOS UNIVERSITY

COLLAGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ECONOMICS

Advisor's Name …................................................ GELAGAY (MSC.)

NAME ID No Phone No
Dagnaw Tadele ….. …..............................................BER/ 251/09..……………0920299138
Demeke Mengistu …..................................................BER/331/10 ……………...0918384794
Elias Adeferis ............................................................BER/339/10 ………………0920299134
ACKNOWLEDGEMENT

First and for most we would like to thank almighty God for his help till today then we would like
to extend our sincerely thank to our family for their helping and growing up we which have own
result in present success. Next we would also like to extend our sincerely gratitude to our advisor
Mr. GELAGAY YENENEH. Who devoted a portion of his time to reading the results of this
paper thoroughly and arranging the concern, and making constructive correction throughout this
paper.
Last, but not least we would like to express our profound gratitude and appreciation to all our
friends for their likely discussion in helping our on this study.

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LIST OF ACRONYMS

ADF Augmented Dickey Fuller

CSA Central Statics Agency
ECM Error Correction Model
EG Eangle granger
GDP Gross Domestic Product
RGDP Real Gross Domestic Product
MOE Ministry of Education
MOFEC Ministry of Finance and Economic Co-operation
OLS Ordinary Least Square
PE Primary Education
SE Secondary Education
HE Higher Education

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Contents
ACKNOWLEDGEMENT...............................................................................................................................................i
LIST OF ACRONYMS..................................................................................................................................................ii
ABSTRACT....................................................................................................................................................................v
1. INTRODUCTION......................................................................................................................................................1
1.1. Background of the study......................................................................................................................................1
1.2. Statement of the problem.....................................................................................................................................2
1.3. Hypothesis of the study........................................................................................................................................3
1.4. Research Questions..............................................................................................................................................3
1.5 .Objective of the study..........................................................................................................................................4
1.5.1. General objective..........................................................................................................................................4
1.5.2. Specific Objectives.......................................................................................................................................4
1.6. Significance of the study......................................................................................................................................4
1.7. Scope of the study................................................................................................................................................4
1.8. Organization of the study.....................................................................................................................................5
CHAPTER TWO............................................................................................................................................................6
2. LITERATURE REVIEW...........................................................................................................................................6
2. 1. THEORETICAL REVIEW................................................................................................................................6
2.1.1 .Growth Components and Growth Models....................................................................................................6
2.1.2. Concept of Human Capital Theory and Economic Growth..........................................................................8
2.1.3   Effect of Education on Economic Growth.................................................................................................11
2.1.4. The importance of higher education for economic growth.........................................................................14
2.2 EMPIRICAL EVIDENCES................................................................................................................................16
2.2.1 The Link between Human Resource Developments and Economic Growth..............................................16
2.2.2. The Role of Education on Economic Growth of Developing Countries....................................................18
CHAPTER THREE......................................................................................................................................................22
3. RESEARCH METHODOLOGY..............................................................................................................................22
3.1. Data Sources and Type......................................................................................................................................22
3.2. Method of Data Analysis...................................................................................................................................22
3.3. Model specification and expected results..........................................................................................................22
3.3.1. Theoretical base..........................................................................................................................................22
3.3.2. The Econometric model..............................................................................................................................23
3.3.3 Estimation method.......................................................................................................................................24
3.4.4 Econometric Tests Used..............................................................................................................................25

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 B.Test for multicollinearity...................................................................................................................................26
CHAPTER FOUR.........................................................................................................................................................29
4. BUDGET SCHEDULE AND REFERENCES.........................................................................................................29
4.1. Time Budget schedule........................................................................................................................................29
4.2. Financial Budget schedule.................................................................................................................................29
REFERENCE................................................................................................................................................................31

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 ABSTRACT

The study will have to fill the gap on human resources development (higher education in
Ethiopia relating it to economic growth and this study will be aimed to investigating the role of
higher education on the economic growth of Ethiopia). Education is disaggregated into
categories of primary, secondary and higher education and by entering enrolment as its proxy
part and use gross capital formation, labor and rainfall variables in econometric model.
Econometric frame work will be employed as a general method of analysis using secondary data
will be collected from MOFEC, MOE, and CSA for the period 1984/5-2018/17. The Eangle
Granger two step procedures will be followed to estimate the long run and short run coefficients
of the variables of the model.

v
1. INTRODUCTION.

1.1. Background of the study

Ethiopia possesses a long year tradition of elite education linked to the Orthodox Church. But
modern higher education was introduced in 1950,s with the founding of university college of
Addis Ababa. Since then a number of higher education institutions which include university,
college and TVET are increasing. Though their number is low and their quality is poor yet the
contribution for growth is quite important (https://en.wikipedia.org/wiki/Education_in_Ethiopia)
11:03 AM 11-Mar-2020
Ethiopia is endowed with large variety of physical capital for example, natural resource, however
there is a limited number of man power. So to increase link between the sectors our education
should be developed, also a person with high level of formal education is better placed to adopt,
understand, learn, use and create ideas (Teshome,2007).
Education satisfies a basic human need for knowledge, adds greater sense of participation, and
provides a means to meeting other basic needs, help to add cultural and civil dimensions to an
individual existence. That is why most of the studies in the area of human capital use formal
education (usually years of schooling) and informal education (Age and experience) to analyses
the contribution of human capital to growth (Tilak, 1992). Human capital refers to the productive
power of human or labor resources resulting from investment in education or training. One of the
most important issues in human capital theory is to know the contribution of human capital to
economic development. Various researchers in many parts of the world have been trying to
analyze the effects of education on the economy of a given country both at the macro and micro
levels. according to Sharp & Register (1992), states that the speed at which technique can be
developed, referred and applied to practical use in producing goods and services determines the
rate of technical change and economic progress .It will be a logical deduction to conclude further
that man has to add to his stock of knowledge all the time to have a continuous economic
progress.
Different researchers and authors mentioned the relationship between education and economic
growth. For instance, Tekola (2007) founds that there is positive relationship between education
and economic growth and further he mentioned the contribution of primary education is more

1
than secondary and higher education. Also Elsa&Sofia ( 2003), founds the relationship between
education and growth, especially higher education is strong by creating innovative man power
and highly educated labor force that brings science and technology in practice, which is engine
for economic growth.

 1.2. Statement of the problem

According to World Bank (1990), education is the most important element (means) for both
developing and developed countries. It is true that one cannot get a countries development
without better education. Because it is through education that a research which is basic for any
type of development can be conducted this seems the fact that all countries in the world give
attention for it.
Different researchers were presented their results about the contribution/role of the three
educational levels (primary, secondary and higher educational levels) for economic growth. For
instance; Tekola (2007), said that all educational levels have significant role but, primary
education is an important determinant of economic growth than secondary and higher education
levels in Ethiopia. Again Kidist (2006), was presented her econometric of OLS model the two
(primary and secondary) education levels are significant but, higher education is insignificant.
Comparing to the positive effect of primary and secondary education for the contribution of
economic growth primary education to be more than the secondary education level and she stated
primary education is corner stone of social development and principal means of improving
individual welfare. Another finding by Teshome (2007), states primary level of education is
important factor in enhancing agricultural sector followed by secondary education but higher
education has insignificant role.
Abraham (2012), in his econometric of time series analyses, all education levels are significant
but comparing to their effects on economic growth in Ethiopia, secondary education is the
highest followed by higher education .Also Azmeraw (2011), said that the positive effect of
secondary education is the largest compared to primary and tertiary education to economic
growth. However, the contribution of higher education is positive its contribution for economic
growth is insignificant.

2
There are two different idea from the above findings regarding the role of higher education for
economic growth in Ethiopia, in one side significant ( Tekola , 2007;Abraham 2012, ) and the
other side is insignificant ( Azmeraw, 2011 ; and Kidist,2006) .there is variable inconsistency

between the two sides. Inconsistency is something that is not uniform or the same throughout.
There for variable inconsistency is a situation when one researcher or scientist does a research or
an experiment and gets one result and the other does it and gets a contrary result .in this case we

say that, there is variable inconsistency. WWW. your dictionary. Com < inconsistency > Dec.
27.2020 at 02:20 pm
The researcher motivated to know the role of higher education for economic growth in Ethiopia.
It creates innovative man power and highly educated labor force that brings science and
technology in practice, enhance economic development through technological catch-up which is
engine for economic growth in creating import substitution manufactures that in turn create huge
access of employment. By doing so, industrialization can be achieved.

1.3. Hypothesis of the study

Higher education level contribute much for economic growth by creating skilled man power and
increasing productivity which are necessary for growth compared to primary and secondary
education levels.
In other words using coefficients of each educational enrollment (primary, secondary, and higher
Education) in the model constructed the above comparison can be written as follows.
 Role of higher education for economic growth is greater than primary education levels.
 Role of higher education for economic growth is greater than secondary education levels.

1.4. Research Questions

This paper will answer the following research questions.
 What is the trend of higher education in Ethiopia?

 What is the contribution of higher education for economic growth?

3
  Is higher education has more role on economic growth as compared to primary and
secondary education?

Therefore, this paper will provide the empirical investigation of the role of higher educational
level and show its effect on economic growth compared to those primary and secondary
education levels.

1.5 .Objective of the study

  1.5.1. General objective

The main objective of the study is to examine the role of higher education for economic growth
of Ethiopia.

  1.5.2. Specific Objectives 

In addition to the above general objective the study will have the following specific objectives.
 To compare the role of primary, secondary, and higher education for economic growth.
 To show the trend of higher education in Ethiopia.
 To draw policy implications from the empirical analysis for the future.

1.6. Significance of the study

This study will provide essential and additional information to the existing literature regarding
the role of higher education on the economic growth of the country and it will provide empirical
evidence with respect to the role of higher education institution for economic growth by
assessing the specific situation for Ethiopia. And also this finding will inspire or motivate the
next researcher to conduct in-depth and detailed studies in the area of economic growth and
higher education.

1.7. Scope of the study

This study covers the investigation of role of higher education on economic performance of
Ethiopia from the year 1984 to 2018 G.C based on the data recorded by NBE, MOFEC, CSA and
MOE and related study on the role of higher education to economic growth.
4
1.8. Organization of the study

This paper is organized in to three main chapters and each main chapter has its own sub titles,
the remaining chapters (the second and the third) chapter. The second chapter is about the
theoretical and empirical review of literature; the third chapter is about data sources and
methodology of the study.

5
 CHAPTER TWO

2. LITERATURE REVIEW

2. 1. THEORETICAL REVIEW

2.1.1 .Growth Components and Growth Models

Economic growth as measured by GDP (Gross domestic product) is determined by two

components:- population and labor productivity. Population growth represents a proxy measure
of the quantity of labor in the economy. Although there are numerous measures that are more
experienced, over time total population growth has provided a reasonable estimate for high level
analyses of the first component of economic growth. The second component of economic
growth, labor productivity reflects the ability for increased output from the existing quantity of
labor in the economy. For high level analysis a productivity measure using overall economic
production provides the most comprehensive and consistent measurement of economic
productivity (https://www.crestmontresearch.com/blog/document/gdp-populationgrowth/ ) 10/03/2020.
Total factor productivity is defined as the variable that accounts for that part of the total output of
an economy that is not account by the inputs of the model. In economic growth model the first to
be included as inputs are physical capital and labor. But now day’s economic growth theorists
recognize new components that are less tangible factors like human capital and technological
efficiency and they play important role in the economic growth (wood, 2009).

Economic growth affected by five main variables these are:  natural resources, capital formation,
technological development, social and political Factors and human capital. Among this human
capital refers the productivity of workers to one of the most important determinant of economic
6
growth of a country. The quality and quantity of available human capital can directly affect the
growth of an economy. The quality of human capital is dependent on its skills, creative abilities,
training, and education. If the human resource of a country is well skilled and trained then the
output would also be of high quality (http://www.economicsdiscussion.net/economic-growth/5-
factors-that-affect-the-economic-growth-of-a-country) 1:09 PM 10/03/2020

Harrod-domar model assumes fixed production that is it does not allow factor substitution
between labor and capital, it also assumes constant output ratio, and that is, it ignores the
improvement in productivity. In addition to this, it neglects the entrepreneurial behavior which
actually determines the warranted growth rate in the economy. But these assumption are relaxed
by Neoclassical model (Jhingan, 2004).
Endogenous growth models discard neoclassical assumption of diminishing return to capital. In
this model, capital is broadly defined as human capital and physical capital embodied in material
objects. The main argument of the new growth model for the existence of increasing return is
due to deliberate innovation which is fostered by allocation of resources in research and
development (Ray, 1998).
In the endogenous growth approach human capital affects total factor productivity in two
channels. First, higher level of human capital directly influences productivity via its impact on
domestic innovation. Secondly higher level of human capital causes improvements in total factor
productivity by facilitating the adoption and implementation of foreign technology. The factors
leading to endogenous growth (in particular technological change) are explicitly related to the
stock of human capital. Technology and human capital are both “endogenous” to the system
(Tallman & Wang, 1990).
The new growth theory pre occupied with a question: how to explain the persistence of growth
rather than how to get it started. It provides a theoretical framework for analyzing endogenous
growth, present GNP growth that is determined the system governing the production process
rather than by forces outside that system. In contrast to traditional neo-classical theory, these
models hold GNP growth to be a natural consequence or long run equilibrium. Models of
endogenous growth bear some structural resemblance for their neo-classical counter parts, but
they differ considerably in their underlined assumptions and the conclusion drawn. The new

7
growth theory assumes that public and private investments in human capital generate external
economies and productivity improvements that offset the natural tendency for diminishing
returns. The theory seeks to explain the existence of increasing returns to scale and the divergent
long run growth patterns among countries. Whereas technology still plays an important role in
these growth models (Todaro, 2006).  
Robert Solow introduced a new classical growth model which is based on two fundamental
equations namely cob Douglas production function with labor augmenting technology and
capital accumulation equation. Basically the model shows how saving, population growth and
technology progress affect the level of an economy’s output and its growth over time. Here, the
technological progress refers to expand in the society’s production capabilities. That is efficiency
of labor which reflects society’s knowledge about production methods. This kind of change in
the productive capacity of labor is called labor augmenting technological progress which result
by improvement in the health, in education or skills of labor (Mankiw, 2009)
Endogenous growth model which takes technological advancement as endogenous unlike Solow
model. This model explains the technological advance with no diminishing returns to capital.
Best case that explains this model is, knowledge which seen as a type of capital. Since, it is less
likely to assume that knowledge exhibits diminishing returns. Obviously, knowledge is an
important input in the economy, both in the production of goods and services and in the
production of new knowledge. Moreover it is assumed that there are increasing returns to
knowledge, this can be shown by the increasing pace of scientific and technological innovation
over the past few countries (Mankiw, 2009).

2.1.2. Concept of Human Capital Theory and Economic Growth

The concept of human capital plays a major role in modern treatments of growth theory and of
labor economics. In one sense, the distinction between the two is in levels of aggregation. At the
macroeconomic level the social stock of human capital and its growth are central to the process
of economic growth; at the micro level differences in human capital stock and in their growth
can explain much of the observed variation in the wage structure and in the wage distribution
among individuals and groups. Although pursued independently these applications view human
capital and its growth as a cause of economic growth: of the economy as a whole in the theory of
8
growth, and of individuals in labor economics. Human capital is implicated in the process of
growth not merely as a cause but also as an effect of economic growth or of developments
generated by economic growth. The reciprocal relation between economic growth and the
growth of human capital is likely to be an important key to sustained economic growth
(Mincer, 1995).
The theoretical framework more responsive for the whole some adoptions of education and
development policies has come to be known as human capital theory. According to the work of
Schultz, (1971); Sakamota& powers, (1995); and psacharopaulos & hall, (1997), human capital
theory rests on the assumption that formal education is highly instrumental and even necessary to
improve the population is productive population. Human capital theory emphasizes how
education increases the productivity and efficiency of workers by increasing the level of
cognitive stock of economically productive capability which is a product of innate abilities and
investment in human beings. The provision of formal education is seen as productive investment
in human capital which the proponents of the theory have considered as equally or even more
equally worthwhile than that of physical capital. Human capital theory provides basic
justification for large public expenditure both in developing and developed nations. The theory
was consistent with the ideologies of democracy and liberal progression found in most western
societies. Its appeal was based up on the presumed economic return investment in both at the
macro and micro levels. Efforts to promote investment in human capital were seen to result in
rapid economic growth for society. For individuals, such investment was seen to provide returns
in form of individual economic success and achievement (Fagerlind & Saha, 1997)
The concept that investment in human capital promotes economic growth dates back to the time
Adam smith (1776) and the classical economists, who emphasized the importance of investing in
human skills. Classical economists divide factors of production into: land, labor and capital
viewed from the perspective of supply factors of production; whatever their form can be
increased and improved at some cost. The improvements involve weighing future benefits
against current costs. William petty is generally credited with the first serious application of the
concept of human capital, when in 1676 he compared the loss of armaments, machinery and
other instruments of welfare with the loss of human life. Elements of such comparison survived
to the present. However, Adam smith set the subject on its main course. The wealth of nations
9
identified the improvements of workers skills as a fundamental source of economic progress and
increasing economic welfare. It also contained the first demonstration of how investments in
human capital and labor market skills affect personal incomes and structure of wages (Palgrave
dictionary, 1991)
The economic behavior of human as understood by earlier economists like Adam smith is like
investment on a new expensive machine. According to smith, an investment on human capital
development is carried on whenever there is more return than the cost is expected.
Human capital formation is associated with the investment in man and his development.
Investment man refers to expenditure on health, and social services in general and in its broader
sense it refers to expenditure on education and training (Jhingan, 1995). According to the
argument of Sharp & Register (1992), a large part of the investment in human capital is expected
to augment the capacity of labor resources to contribute to gross national productas just
investment in non human capital is expected to increase and expand the capacity of capital
resource to produce.
Human resource development is the process of increasing the knowledge, the skills and the
capacities of all people in a society. In economic terms, it could be described as the accumulation
of human capital and its effective investment in the development of an economy. In political
terms, human resources development prepares people for adult participation in political process,
particularly as citizens in a democracy. From the social and cultural points of view, the
development of human resources helps people to lead fuller and richer lives, less bounded by
tradition. In short, the processes of human resource development unlock the door to
modernization (Harbison & Myers, 1964).
Human resources are developed in many ways. The most obvious is by formal education,
beginning with primary or first level education, continuing with various forms of secondary
education and higher education including the colleges, universities and the higher technical
institutes. Second, human resources are also developed “on the job” through systematic or
informal training programs in employing institutions: in adult education programs and through
membership in various political, social, religious and cultural groups. A third process is self
development as individuals seek to acquire greater knowledge, skills or capabilities through
preparation on their own initiative by taking formal or correspondence courses, by reading or by
10
learning from others in informal contacts. Two other processes of human resource development
are improvements in the health of the working population through better medical and public
health programs and improvements in nutrition, which increases the working capacity of the
people, on man-hour bases as well as over a working life( Harbison & Myers ,1964).
Investment in human capital can be defined as any use of current resources which will increases
the future productivity of labor, for a given amount of their inputs. The main components of
human capital are the body of knowledge possessed by the population and the capacity of the
population to use the knowledge effectively. Investment in human capital primarily includes
resources devoted to education (both formal schooling and informal education services) and to
health (to increase the strength, stamina, vitality and longevity of the labor forces) (Pomfret,
1992).
Human capital activities involve not merely the transmission and embodiment of available
knowledge in people but also the production of new knowledge which is the source of innovation
and to technical change. Without new knowledge it is doubtful that larger quantities of existing
physical capital and more wide spread education and health would create a continuous growth in
sense that is the growth of systematic scientific knowledge (Mincer, 1993).

2.1.3   Effect of Education on Economic Growth

Investment in education is expected to accelerate economic growth by increasing in per capital

income of the educated labor force. As a social investment, education investment also believed to
accelerate economic growth through different social spillover effects (Kidist, 2006).
Education is a process whereby new knowledge in transmitted or acquired by man. Economic to
a large extent depends up on attention in human behavior patterns, because man is the primary
catalyst in productivity process though his managerial ability and he is also a key factor of
production though his physical labor. Education or learning process involves change in human
behavior and therefore, crucial to economic growth from the individual and the aggregate stand
point (Anderson & Bowman, 1968).

11
The earning from the human capital created by education and better health tend to be
increasingly important relative to the income from land property as economic development
occurs. This contributes to greater equality in the distribution of income in the long run.
Education and human capital formation contribute even further to greater equality in the income
distribution when elementary and secondary educations are deliberately extended to a larger
percentage of the population (Schultz, 1981).
Greater investment in education can be expected to yield broad economic benefits. These
benefits include higher incomes and lower fertility of men and women with more education in
addition to having fewer children, tend to live healthier and longer lives. Above all, education is
basic right, an end in its self, an intrinsic part of life and development (World Bank, 1988).
Human resources in economic theory and the attempts to measure the contribution of education
to the economic growth are constructive. But the concept that human resource development
either can or should be analyzed solely in economic terms is misleading. It is correct to assume
that the central purpose of human resource development is to maximize mans contribution to the
creation of productive goods and services. Nor it realistic to measure the return of education
solely in terms of increases in individual’s incomes or the incomes of the economy as a whole.
And increases in productivity certainty should not be taken as the exclusive test of the
effectiveness of human resource development (Rosentein & Rodan, 1962).
The goals of modern societies, as we have already stressed, are political, cultural and social as
well as economic. Human resource development is a necessary condition for achieving all of
them. A country needs educated political leaders, lawyers and judges, trained engineers, doctors,
managers, artists, writers, craft men and journalists to spur its development. In an advanced
economy the capacities of man are extensively developed: in a primitive country they are for the
most part undeveloped. If a country is an able to develop its human resources, it cannot develop
much else, whether it to be a modern political and social structure, a sense of national unity,
higher standards of material welfare. Countries are under developed because most of their people
are under developed, having no opportunity of expanding their potential capacities in the service
of society (Curle, 1962).

12
Human resource development, therefore, may be more realistic and reliable indicators of
modernization or development than any other single measure. It is one of the necessary
conditions for all kinds of growth social, cultural or economic investment in man will not
promote continuous economic growth unless it is accompanied by the investment of physical
capital in productive enterprises ( Harbison & Myers ,1963).
According to Todaro (1997), for many years people had the concept that educated and skilled
labor force is a necessary condition of sustained economic growth. The contribution of education
to economic growth is by creating a more productive labor force and endowing it with increased
knowledge and skill, providing wide spread employment and income earning opportunities for
teachers, school, construction workers, publishing workers and others, creating a class of
educated teachers to the place of others, promoting literacy and creating modernity. Third world
nations were very deficient in their supply of middle and high level skilled man power. Without
such man power, which it was assumed could be created only through the formal educational
system, growth leadership in both public and private sector would be lacking. In the absence of
such leadership to plan be retarded, if not totally curtailed.
More specific attention to the role of education in economic development was sparked by the
concept of investment in human capital which developed in united states and united kingdom in
late 1950’s and 1960’s to explain those aspects of economic growth unaccounted by traditional
factor of production such as land, labor and physical capital (Elias,1996).    
Rich countries have access to a large stock of physical capital, at the same time they invest time
and money in education to provide a large stock of human capital that  is skilled in production,
labor that can operate sophisticated machinery, labor that can create new ideas and new method
in economic activate. Contrary, developing countries are likely to have a shortage of skilled labor
force that fasten the production of output and quality good and service which intern raise
countries economic growth (Ray, 1998).
The knowledge and skill a worker has which come from education and training generates a
certain stock of productive capital. Thus, investment in human capital is an enormously
important component of the overall wealth in any society, because it increases earning of
individual productivity of society (Ehrenberg et al, 1997).

13
Investment on human capital particularly education increases the productivity of worker because
education improves the skill of the worker and the country become independent of foreigners for
specific skills.
Teshome (2008), Education is needed for people to benefit from scientific advantage as well as
to contribute to it. Individuals with education seem to earn more than those without the same as
true for countries with more educated population. Also output per worker at least depends on the
educational attainment of the population. Thus in this sense investing on human capital is as the
counterpart to investing in fixed capital.
Stevans & Weale (2003), Education places a key role in ability of developing countries to
observe and apply modern technology and develop the capacity of self-sustaining growth and
development. So, investing in human resource can improve its quality and thereby have the same
or even a more power full effect on production as an increase in human number. The depth and
breadth of education in the population will also help improving effectiveness of government as a
force for development.
Todaro (2009), Studies have shown the handsome returns to various forms of human capital
accumulation: basic education, research, training, and learning – by doing and capacity building.
Education enriches people’s understanding of themselves and the world. It improves the quality
of their lives and leads to broad social benefit to individual and society. Education raises
people’s productivity and creativity and promotes entrepreneurship and technological advances,
demonstrated in several countries such as Malaysia, Bolivia, China (World Bank, 1998).
Schumpeter (1954), has similarly stressed the role of innovation (which is a by- product of
education) in the process of economic growth. This, he asserted, can be achieved by assigning
key role to entrepreneurs particularly because of their ability to innovate which could be seen
indifferent ways: creation of new products, and new markets; designing of more cost effective
method of production; and organizational restructuring.

2.1.4. The importance of higher education for economic growth

Higher education plays a key role in acquiring and building knowledge. This knowledge serves
as a major deriver of growth in the context of the global economy bay affecting the influential set
of complex factors that determine total factor productivity for a given economy. More
14
specifically, higher education institutions have a critical role in supporting knowledge driven
economic growth strategies, poverty reduction and the construction of democracy, socially
consistent societies through supporting innovation by generating new knowledge, accessing
global store of knowledge and putting it to local use, contributing to human capital formation by
training qualified and adaptable labor force and providing the foundation for democracy, national
building and social consistence.
Pritamkable (2011), A key catalyst for national development and economic growth is generally
assumed to be explained largely by stock of labor, physical capital, human capital and
technology. Here the rate technological change in the growth equation is associated with
availability of highly educated workers which are products of higher education institutions.
Behrman and Birdsall (1985), Higher education can lead to economic growth through both
private and public channels. The private benefits for individuals are well established and include
better employment prospects, higher salaries, and a greater ability to save and invest. These
benefits may result in better health and improved quality of life, thus setting off a virtuous spiral
in which life expectancy improvements enable individuals to work more productively over a
longer time further boosting lifetime earnings. Public benefits are less widely recognized, which
explains many governments’ neglect of tertiary schooling as a vehicle for public investment. But
individual gains can also benefit society as whole .Higher earnings for well-educated individuals
raise tax revenues for governments and ease demands on state finances. They also translate into
greater consumption, which benefits producers from all educational backgrounds. In a
knowledge economy, tertiary education can help economies keep up or catch up with more
technologically advanced societies. Higher education graduates are likely to be more aware of
and better able to use new technologies. They are also more likely to develop new tools and
skills themselves. Their knowledge can also improve the skills and understanding of non-
graduate co-workers, while the greater confidence and know-how inculcated by advanced
schooling may generate entrepreneurship, with positive effects on job creation (Bloom et al,
2006).
Need for quality in higher education is important. In deed the knowledge nexuses is regarded as
a key deriver of sustainable social and economic development. All countries including low
income countries need to invest on higher education and in a vital research community.
15
 Tsige (2009), Higher education has a vital role to play in shaping the way in which future
generation learn to cope with the complexity of sustainable development. Since universities and
higher education institutions educate highly qualified graduates and responsible citizens able to
meet the needs all sectors human activities. Yet again universities advance, create and
disseminate knowledge through research and provide as a part of their service to the community
relevance expertise to assist societies in cultural, social and economic development (Tsige,
2009).

2.2 EMPIRICAL EVIDENCES

2.2.1 The Link between Human Resource Developments and Economic Growth

There have been many research`s undertaken empirical evidences regarding the role of education
to the economic growth. The result of these research`s generally shows that education has a
positive contribution to the economic growth.
A study by Judson (1998), attempts not only to substantiate the role of increasing investment in
education in promoting growth, but also to examine the importance of the allocation of this
investment in the growth context. Judson uses UNESCO data on educational enrolments and
spending to estimate the efficiency of existing educational allocations within countries. Overall,
a 1 % increase in human capital growth is found to be associated with an 11 % increase in GDP
growth rate (11). Judson applies a country comparative growth decomposition regression to
show that the correlation of human capital accumulation is not significant in countries with poor
allocations but it is strongly significant and positive in countries with better allocations
(predominantly richer countries). This finding that the contribution to growth of human capital
depends on the efficiency with which it is accumulated has important policy implications in
terms of the exact allocation of educational and training resources.
Graff (1995), examined the role of human capital in explaining economic growth in some 114
countries from 1965 to 1985. Generally, the results showed the accumulation of human capital,
physical capital and technological progress all to be significant determinants of the growth
process. In a related study, Graff (1996), investigated the importance of higher levels of
education for a subset of poorer countries. This variable was found to be important for growth, so

16
long as the investment in higher education did not lead to imbalances elsewhere in education
provision, especially to the detriment of elementary levels of education.
Jenkins (1995), uses annual data in UK from 1971 to 1992 and it proxies the stock of human
capital by three series measuring workforce qualifications. These series are used as key
determinants of aggregate output, alongside physical capital, total workforce, capacity utilization
and a time trend. The overall result confirms the finding that investment in human capital
increases productivity. Highly-qualified workers are found to contribute almost twice as much to
productive efficiency as those with no qualifications at all. The relatively small number of
observations means that the unrestricted estimates are imprecisely determined and such results
cannot be regarded as robust.
Another example Asteriou&Agiomirgianakis (2001), who use time series modeling, co-
integrated regressions to explore the long-term relationship between formal education and GDP
in the Greek economy .Gemmell (1996), also worked on OECD (Organization for Economic,
Co-opration and Development) data sets and his original contribution involved the construction
of some alternative measures of human capital based on both stocks and annual average growth
rates at primary, secondary and tertiary education levels. He found that a 1 % increase in initial
tertiary human stock was associated with a 1.1 % increase in per capita GDP growth, while a 1 %
increase in subsequent growth in tertiary education (flow) was associated with almost 6 % output
growth. While the direct growth effects come through tertiary education, secondary education
was found to have an indirect impact through its positive significant association with physical
investment. When these OECD results were compared to a wider sample of countries, it was
found that primary human capital had the most impact in the poorest group of the less developed
countries and secondary human capital was the most significant variable for the intermediate
group of less developed countries.
Benhabib & Spiegel (1994), use a new set of country comparative data on human capital stock
initially to test the augmented neoclassical model and later to modify the specification to allow
human capital to enter directly into productivity in an endogenous growth specification. The
neoclassical model yields insignificant and generally negative coefficients on the human capital
stock variables, a result which holds when other repressors are added into the model and
alternative proxies for human capital are applied. In contrast, the endogenous specification
17
produces human capital levels that are positive, but not always significant, determinants of per
capita income growth. These results suggest a distinct role for human capital in enabling foreign
technology in developing countries and the creation of new domestic technologies in more
highly developed countries, rather than entering the model on its own as a conventional factor of
production.
Hicks (1980) analyzed the relationship of literacy and economic growth by using data for 83
countries and found out that a 20% increase in literacy is associated with 0.5% higher growth
rate.
Wheeler (1980), using data for 88 countries has found a stronger relationship in which an
increase in literacy from 20% to 30% resulted in real GDP growth from 8% to 16%.( Tilak,1989)
finding not only reaffirmed the importance of education but also shade light on the weak role of
physical capital investment unless it is supported by education .Curle (1964), as cited by Elias in
1990, studies that tried to correlate educational indicator and per capital income in 1954-1959
using 50 countries data. He was found a correlation coefficient of 0.5 between GNP per capital
and percentage proportion of GNP invested in education and 0.64 between GNP per capital and
secondary education.

2.2.2. The Role of Education on Economic Growth of Developing Countries

Khan et al (2011), found that education and economic growth has long run relationship in
Pakistan. According to the researcher finding using 29 years’ time series data and applying co-
integration and error correction models, better standards of education improve the efficiency and
productivity of labor force and effect the economic development in the long run. However, in
short run education does not have any significant relation with economic growth and the paper
suggests the government to increase the expenditure on education sector to promote research and
development activities and improve quality of education in order to improve the economy’s
growth performance.
According to Elsa-Sofia (2003), research on higher education relation with employment and
economic growth in Mexico and Peru shows positive relationship between higher education and
economic growth. The result of this study confirms that the employment rate is a key factor in
the higher education and economic growth relationship and regression using 30 years (1970-
18
2000) time series data for the variables examined. It shows that a rapid higher education
enrolments per capital and employment which precedes the changes in economic growth.
Adetunji (2005), studied relationship between education and economic growth in Nigeria
between 1970 and 2003 found long run relationship between education and output per worker in
Nigeria. The long run relationship is more pronounced for enrolment at primary school level,
tertiary school level and average years of schooling. The result suggests that the level of human
capital measured by average year of schooling is consistently significant and established that
human capital has a positive effect on productivity (output) growth in Nigeria. It found that a 1%
increase in the average years of schooling cause 0.86% increase on output per worker. Generally,
the finding shows long run relationship between enrolment in primary and tertiary level with
output in Nigeria and supports the human capital as a source of economic growth.

Hessen et al. (2008), verified the link between education and economic growth of sub Saharan
Africa including Ethiopia using 30 years time series data from 1975 to 2005 involving 39 sub
Saharan countries. According to the finding there is positive causal relationship between
enrolment ratio and per capital GDP growth rate. The argument for this increased education
besets more skilled workers, increased productivity and growth at the end. Based on the result
found the paper suggests that expenditure on education is not sufficient but also there must be
equal participation of female and institutional quality. Even government educational policies
may play very important roles.
Another finding by Tsehaynesh (2003), in her research paper on the impact of education on the
economic growth of Ethiopia, using 41 years time series data, she regressed GDP on enrolment
and other independent variables that affect countries output and she found that a percentage
increase in education will result in 10% increase in GDP growth so as to people became more
educated the amount increase in GDP growth will be higher. The reason for this is first,
education improves the productivity of labor, advancement in knowledge and skills enable
workers to use their labor effectively. Second, education opens the door to innovation. More
educated innovate and supply workers with improved capital inputs. Third, these improved
capital inputs require less labor to work with them resulting in surplus labor and this surplus
labor will be engaged in other activities and can extend production varieties. In country like
19
Ethiopia, where education expansion is at a very low level compared to other countries, by
avoiding problems associated with expanding education and quality associated with it can
achieve high level of growth and development and she recommended  the establishment of
number of public schools with continuous evaluation of the curriculum. She presented
government to solve the problem associated with financing education and creating awareness
about the advantages of education in the society.
Netsanet(1997), has established the same fact in Ethiopia. He used error correction model to look
in to the short run and long run dynamics to explain the impact of education to the economic
growth, he used enrolment ratio at different level. And he found out that both in the short and
long run education enters positively and significantly in explaining output. The contribution of
primary education is found to be relatively large when compared with high levels of education in
both cases.
Sisay (2001), working on educational financing in Ethiopia. He used the simple description
analysis and the analytical description. He found that the financial expenditure in education
showed real increasing tendency except for a few years. He found also that there are educational
problems due to its financing only by government; it creates a tendency of adopting higher
education sector which is low cost and low quality program. Generally he concludes that
Ethiopia should adopt a mechanism to make higher education beneficiary’s cover some of the
education cost according to the benefit they get.
According to Tsega (2009), though significant proportion of GDP growth is still being observed
in the country, educational expansion and quality are at a very low level compared to other
countries.

Toya et al. (2010), finds a positive relationship between education and income growth in the
world. The positive and significant relationship remained unchanged whether education was
measured as years of education completed at all levels or years of secondary education
completed.
Barro & Lee (2010), find that education as measured by years of schooling completed by the
adult population has a significant growth impact, all things equal. Similarly, (Cohen&Soto,2007)
investigates the effects of education on income growth and find that both initial years of
20
schooling and change in years of schooling have significant positive impact on income growth in
the world.
The literature on return to human capital in developing countries focuses predominantly on
measuring the returns to additional years of schooling for wage earners.
Psacharopoulos (1994) summarizes the results from more than 55 wages studies from Africa,
Asia, and Latin America. These summaries present a consistent pattern of very large returns to
primary education and somewhat smaller returns to secondary and post- secondary education
Psacharopoulos (1994), found that average private rate of return to primary education in
developing countries was 29%, while the returns to secondary and post-secondary education
were 18% and 20%, respectively. The main problem with the focus of this study is that majority
of individuals in developing countries are not wage earners. For example, only about 20% of
working individuals in Ghana were wage earners at that time. Similarly, wage earners made up
to 15% of work force in India, 19% in Haiti, 20% in Nigeria, and 11% in Togo World Bank
(1995).

21
 CHAPTER THREE

3. RESEARCH METHODOLOGY
3.1. Data Sources and Type
 For effective accomplishment of the study we will use secondary source of data which is time
series in nature. Accordingly the data on GDP, labor force, and capital will be collected from
different institution such as NBE, MOFEC and CSA and enrollment for primary, secondary and
higher education levels will be taken from MOE.

3.2. Method of Data Analysis

The information that will be obtained from various sources such as, NBE, MOFEC, CSA and,
MOE will be analyzed in both descriptive and econometric approach. Descriptive analysis will
be used to examine the overview of Ethiopian education system and will attempt to show the
trends of Ethiopian higher education using descriptive tools like tables, graphs, percentage as
method of data presentation; while the econometric model will be used so as to investigate the
effect of higher education on economic growth. The software used for analyzing data will be
STATA version (13.0)

3.3. Model specification and expected results

3.3.1. Theoretical base

There are many economic models that describe the sources affecting real GDP or gross output of
a country. The Solow model in (1956), for ease of exposition, is assumed that there are two
inputs, labor (L) and capital (k), with only one aggregate output (y). The model happily to the
case where there are multiple inputs and out puts provided the production function, represents
“total factor productivity”. As will become clear, there is no technological change because
growth of technology is assumed to be exogenous. On the other hand the Keynesian theoretical
approach focuses on investment, savings and government expenditure as the major variables
affecting the growth rate of GDP. The approach suggests that a high rate of savings is an
22
essential condition for a high rate of growth in GDP. Government guidelines have to ensure
savings are made compulsory, or provision of effective incentives for people to suspend
consumption.

3.3.2. The Econometric model

RGDPt=β0+β1GCFt+β2LFt+εt……………………………………………………. (1)
Where β1 and β2 are coefficients of each variable
          RGDPt=real GDP at time t
          GCFt= gross capital formation at time t  
          LFgt= labor force at time t
           εt =error term
The above econometric model can be expanded by adding the amount of annual rainfall as a
separate variable. Since the Ethiopian economy is dominated by rain fed agriculture, weather
(rainfall) is included in the growth model as one of the most vital exogenous factors. Its inclusion
can be justified in two ways. First, lack of rainfall directly reduces the level of output in the
agricultural sector. Second, as the performance of non-agricultural sectors largely depends on the
agricultural sector via inputs supply and demand linkages, lack of rainfall has an adverse impact
in the process of capital formation. Sometimes rainfall has a “twin hazard” effect in that
excessive rainfall may have an adverse impact on output (seid, 2000). But the probability of
occurrence of excessive rainfall is low in Ethiopia. As a result, this study doesn’t entertain such
effect. Therefore, annual rain fall will have positive effect on economic growth.
Therefore, the model can be re-written as
RGDPgt=β0+β1GCFgt+β2LFgt+β3RFgt+εt…………………………………………………….(2)
Where β1, β2, and β3 are coefficients of each variable RGDPt=real GDP at time t
            GCFt= gross capital formation at time t  
             LFt= labor force at time t
            RFt=rain fall at time t
              εt =error term

23
The most frequently used approach to investigate how higher education affects growth of an
economy is to treat human capital or average years of schooling of the labor force as an ordinary
input in the growth model. Education enrolment rate as proxy of human capital will be taken as
an input in the model. The researcher will be collected for 34 years of data from 1984 to
2018G.C. the contribution of higher education to economic growth or gross domestic product
will be analyzed by using the following model.
Therefore, the growth of real gross domestic product (RGDPg) can be re-written as.
RGDPt=β0+β1GCFt+β2LFt+β3RFt+β4Et+εt………………………………………………….(3)
Where β1, β2, β3and β4 are coefficients of each variable
           RGDPt=real GDP at time t
           GCFt= gross capital formation growth at time t  

           LFt= labor force growth at time t

           RFt= amount of rainfall at time t
          Et= Educational attainment at t
          εt =error term
In order to predict the effects of each level of educational attainment, the variable educational
enrolment is decomposed to primary education (PE), secondary education (SE), and higher
education (HE). So, the final econometric model can be re-written as follows.
RGDPt=β0+β1GCFt+β2LFt+β3RFt+β4PEt+β5SEt+β6HEt+εt…………………………….(4)
Where β1, β2, β3, β4, β5, and β6 are coefficients of each variable
         PEt= enrolment rate of primary education at time t
        SEt= enrolment rate of secondary education at time t
        HEt= enrolment rate of higher education at time t
 εt =error term

3.3.3 Estimation method

The long run regression equations will be estimated by time series vector autoregressive (VAR)
mode with ordinary least square(OLS) estimation techniques to establish the long run

24
relationship between real GDP (output), capital formation, labor, rainfall and the three formal
levels of education; primary, secondary and tertiary level.

Variables
Dependant variable
The dependant variable in this model is the real gross domestic product (RGDP) in terms of its
growth rate.
Explanatory (independent) variables
Independent variables are important factors for growth such as labor, capital, rainfall and the
three formal education levels (primary, secondary, and higher education) are included in the
growth model. Since, we will use these variables after transform to their growth rates.
Expected sign of education on RGDP
The variables included in the model will be expected to have effect on economic growth. The
educational levels (primary, secondary, and higher education) have a crucial effect on economic
growth, the level of gross capital formation and effect of higher education on economic growth
can be positive and greater compared to other educational levels. The other variables are also a
positive determinant of economic growth in supporting of human capital creation.

3.4.4 Econometric Tests Used

Any time series data in econometric model needs appropriate tests before put estimation. So, we
will be estimated, appropriate tests for the variables to observe their time series properties.
Accordingly, we will carry out unit root test, co-integration test, hetroscdasticity,
multicollinearity, autocorrelation.

A.Test of stationarity

25
A least square regression analysis based on time series data implicitly assumes that the
underlying time series is stationary. Stationarity means that the statistical properties (mean,
variance and autocovariance) of a time series (or rather generating it) do not change over time.
However, in practice most economic time series are non-stationary. If a time series is non-
stationary,we can study its behavior only for the time period under consideration, it is not
possible to generalize it to other time periods. So, it is better, to test the stationary of the series
before we proceed to any further technical manipulations.
Formally, the stationary can be checked by finding out if the time series contains a unit root test,
this entails exploring the univariate time series behavior of the data. Non-stationary time series
can be stationary by continuously differencing is called integrated stochastic process. (Maddala,
1992)
A series is said to be differenced of order d if it became stationary after differencing it dtimes.
On the other hand, if a time series is stationary at level, (i.e. if it does not require differencing) it
is said to be integrated of order zero I(0), and if the non-stationary have to be differencing once
to make stationary are called integrated of order one I(1) (Gujarati, 2003).

Some of the techniques available to evaluate the time series characters include Dickey- fuller
(DF) and the Augmented Dickey-fuller (ADF). The paper will use the augmented Dickey-fuller
(ADF), which can be obtained by augmenting the Dickey fuller (DF). The objective of this test is
to test whether the series is in deterministic or gravitate to some steady- state level. If the time
series is in deterministic, the effect of any shock to the series will persist (that is why some say
random walks have infinite memory). On the other hand if the series gravitate to some steady
state level (stationary), then the effect of shocks to the series will fade away over time (Gujarati,
2003).

B.Test for multicollinearity

Multicollinearity refers to the situation where explanatory variables are highly inter-correlated
meaning that one can be linearly predicted from the others with a substantial degree of accuracy.
We can detect multicollinearity problem through variance inflation factor.
C. Autocorrelation test

26
Autocorrelation is a mathematical representation of the degree of relation between a given time
series and a lagged version of itself over successive time intervals. The problem of
autocorrelation can be tested through Durbin-Watson d statistic.
D. Heteroskedasticity test
Hetroskedasticity refers to the distribution of the error term where the variance of the error terms
differs across observation. Breusch-Pagan test is one way of detecting heteroskedasticity
problem

E. Co-integration test
An important issue in econometrics is the need to integrate short run dynamics with long run
equilibrium. The analysis of short run dynamics is often done by first eliminating trends in the
variable usually by differencing. The procedure, however throw out potential long run
relationships about which economic theories have a lot to say (Maddalla, 1992).
In order to obtain both the short run dynamics and the long run relationships, one can appeal to
what is known as co-integration. The interpretation of co-integration is that two or more series
are linked to form an equilibrium relationship spanning the long run, then even if the series are
non-stationary, they will move together over time and the difference between them will be
stationary (Harris, 1995; mihret, 2002). The test for co-integration is to test whether the residuals
from the level regression are stationary. If these residuals are stationary, then the series are co-
integrated. The level regression will then provide consistent estimate of the long run
relationship.So far, there are two major procedures to test for the existence of co-integration,
namely, the Engle- granger two step procedures and the Johansen maximum likelihood
estimation procedure. The Engle Granger test show if there is co-integration between variables.
But Johansen do not. So, the study will use the Engle Granger two step procedures in particular.
Here, the variables entering the co-integrating vector are tested for integration of the same order.
The first step is to estimate the long run static model of the same level of integrated variables and
obtain the residual. If this residual, which is the linear combination of the variables are said to be
co-integrated, that is they do have long run relationship. The second step in this procedure is to
27
estimate the error correction method (ECM). This will allow estimating, the dynamic model
using differenced variables where the coefficient of the lagged residual will be the deviation
from the long run relationship (Maddalla, 1992).
F. The Error correction model
To explain the short run relationship between independent and dependent variables that are co-
integrated, ECM is used. Even if the variables of the model are co-integrated, there may be
disequilibrium in the short run. As a result, the residual of the long run model can be treated as
the equilibrium residual and it can be used to connect the short run behavior of the dependent
variable to its long run value. The ECM is also important since it conveys information for the
speed of adjustment from short run disturbance to long run equilibrium (Gujirrati,2004).

28
 CHAPTER FOUR

4. BUDGET SCHEDULE AND REFERENCES

4.1. Time Budget schedule

It describes the plan of ongoing process toward achieving the research objectives. It shows how
each project activity is to be measured in terms of completion, the timeline for its completion.
Therefore, enable to and the advisor to monitor project progress and provide timely feedback for
research modification or adjustment we use the following time plan.
No Activity Nov Dec Jan Feb Mar Apr May June YEAR

to to to to to to to to
2012E. 2013E.C
Dec Jan Feb Mar Apr May June July
C
1 Topic selection  

2 collection of    
useful material
3 Preparation of ✔  
proposal 

4 Data collection  

5 Data analysis  
and writing
final proposal
6 Submission of 
proposal 

7 Presentation of  
proposal
29
4.2. Financial Budget schedule
It will show how much it will cost to accomplish this research. We are explicitly state cost for
every budget item that should be quantitatively shown. Typically, our proposal budget reflects as
follows;
No Equipment and personnel items Budget cost YEAR
2012E.C 2013E.C
1 For Printing & photocopy and lamination of the 300 birr
proposal paper 
2 Internet expense 100 birr 
50birr 
3 Other miscellaneous expense like pen, paper flash...etc 300 birr 
150birr 
4 Total 900birr

30
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35