Human Capital Spending and Its Impact on Economic Growth in Saudi Arabia: An NARDL Approach

The principal objectives of this study were to determine how government spending on human capital, specifically on education and healthcare, impacts Saudi Arabia’s economic growth and its policy implications for sustained economic growth and development. Given the above objectives, this study examined the short-term dynamics and long-term relationships between government spending on human capital, measured by per capita education and healthcare expenditures, and its impact on Saudi Arabia’s economic growth, measured by per capita real GDP, from 1985 to 2021. The Non-linear Auto-regressive Distributed Lag (NARDL) models were used to estimate and examine the relationships. The study concluded that per capita GDP is negatively correlated with per capita government spending on healthcare and positively correlated with per capita spending on education in Saudi Arabia. Per capita GDP is also positively related to exports per capita. The results of the coefficient symmetry test show that per capita spending on healthcare and education causes long-term, asymmetric effects on Saudi Arabia’s per capita GDP, that is, the decline in per capita GDP resulting from a decrease in education spending per capita is larger than the increase in per capita GDP resulting from an increase in education spending per capita. However, the decline in per capita GDP resulting from an increase in healthcare spending per capita is larger than the increase in per capita GDP resulting from a decrease in healthcare spending per capita. The study also found unidirectional causality from per capita spending on healthcare, education, and exports to per capita GDP. Therefore, this study infers that increases in government healthcare spending reduce economic growth, whereas increases in spending on education contribute to it. Saudi Arabia’s economy also experiences export-led economic growth. The results of this study provide the government and policymakers with valuable insights with respect to the efficient allocation of scarce government resources to education and healthcare for sustained economic growth and development.