The Impact Of Public Sector Investment In Human Capital On Economic Growth: A Case Study Of Healthcare And Education In Kenya

Abstract

This study sought to explore the impact of public sector investment in human capital on economic growth in Kenya. In order to establish the impact specific components of investment in human capital on economic growth, human capital was disintegrated into two major components of education and healthcare. The dependent variable was economic growth expressed as real GDP while expenditure by the government on the two components human capital formed the independent variables. The study utilized time series secondary data sourced from the different Kenya’s annual Economic Surveys and Statistical Abstracts by KNBS and data from World Bank database. The study was anchored on Solow’s Swan growth model and used ADF test to check for the presence of unit root and the test found that all study variables were stationary. Johansen (1988) was also utilized in checking for long run correlation between the study variables and it was confirmed that the variables were cointegrated and therefore restricted VAR was estimated. Estimates obtained from restricted VAR were used to derive impulse response functions and variance decomposition analysis and the results used to interpret the impacts of investment in human capital development on education and healthcare on growth of the Kenyan economy. The study found that investment in healthcare and education had a consistently positive impact on the growth of the economy and that such positive impact was felt both in the short-term and long-term. The study therefore recommended that the government through its relevant policy making and budgeting institutions design policies aimed at attracting and improving both public and private sector investments in researched components of human capital to spur growth of the economy and help achieve its development goals as envisioned under Vision 2030 development blue print. Key Words: Human Capital, Economic Growth, Investments, Solow growth Model, Impulse Response Function, Impact, and Budgeting.