This paper estimates the impact of human capital on economic growth in a sample of twelve Arab
countries, namely, Algeria, Bahrain, Egypt, Jordan, Kuwait, Mauritania, Morocco, Qatar, Saudi
Arabia, Sudan, Tunisia, and the United Arab Emirates, and compares the results to two samples of
Asian and advanced countries. Our calculations show that the overall cross-country and average
elasticity for the twelve Arab countries is approximately 0.5. Thus, a 1 percent increase in human
capital increases the GDP growth by about half percentage point. The average elasticity of human
capital per unit of labor variable in the Asian sample is about 0.6, which is slightly higher than the
elasticity estimated for the Arab countries. For the advanced countries, the value of the elasticity
stands higher at nearly 0.9.
Considering these results, the paper confirmed the important positive contribution of human capital
to the economic growth in the Arab countries. Compared to the benchmark of Asian countries, the
sample of Arab countries is not roughly lagging in terms of the contribution of human capital to
GDP growth. However, compared to advanced countries, a lot of efforts are needed to catch up
with the developed world as the contribution of the human capital in the Arab countries is almost
half the level observed in advanced countries.
Furthermore, results also revealed that the production function, in the three studied groups of
countries, exhibits increasing returns to scale to the three production factors: human capital,
physical capital, and labor. This leads to say that the production process in the presence of human
capital is efficient, as the increasing returns to scale means that doubling output requires less than
doubling inputs. This is an important contribution once considering human capital as an explicit
additional factor of production than the only physical capital and rough labor traditionally
considered. Nevertheless, this efficiency is higher in the advanced countries as the increasing
returns to scale is more happening in the sample of advanced countries than in the Arab and Asian
countries.
This paper also examines the two-way direction of causality between GDP and human capital,
which means that while human capital is causing the GDP, the latter also has feedback effects on
the former. This involves obviously important policy implications. The bidirectional causality
creates a loop of effects between human capital and GDP. Henceforth, increasing the contribution
of human capital to sustain long-term growth requires investments in key sectors that directly
enhance human capital. These sectors involve particularly the people’s conventional education and
vocational training, their health, and the investment in research and development for innovative
ideas and inventions, which have higher implications on their long-run productivity. Therefore, governments should give such sectors priority in their expenditures policies which is likely to
sharpen workers’ skills and enhance productivity leading to positive feedbacks on GDP.
Our findings also, suggest that governments, which are interested in enhancing human capital,
should adopt policies that boost not only the stock of human capital, but also its quality. This
would, in turn, give private investors (local and foreign as well) incentives to invest in the
production of skill-intensive and high technology goods with higher value-added compared to
labor-intensive goods. Another reason for governments to consider human capital among its top
priorities is that all the economies are shifting towards a knowledge-based economy (or the
economy of knowledge as interchangeably used in the literature). This requires empowering
human skills and their capabilities to catch up with the advanced countries and reduce the gap and
inequalities in the area of human capital, hence, help to achieve sustainable goals. Finally, Arab
countries, while investing in human capital, are also encouraged to develop human capital statistics
by adopting international methodologies used to measure the quality of human capital particularly.