Human Capital Development and Economic Growth in Tanzania: Public Spending Perspectives

Purpose: The study examines the role of investment as well as human capital development (Public spending on education and health) on the economic performance in Tanzania. Methodology: Time series data covering 1990 to 2020 were, the data extracted from the World Bank data base. The independent (explanatory) variables used were government spending on education, government spending on health, total investment while the dependent variable was the economic growth (measured by gross domestic growth). Before subjecting the data to econometric estimation normality test was carried out and the normalized data were subjected to Augmented Dickey Fuller (ADF) and Phillips–Peron to confirm if data are stationary. The study also used Vector Error Correction (VECM) Model to estimating Long run dynamics after confirming existence co-integrated which was tested using Johansen co-integration test. Findings: Findings from unit root test confirm that variables are stationary after first difference while test for co-intergration revealed of three co-integrated equations. Findings from VECM estimates indicates long run relationship between the economic performance (as measured by GDP) and total investment (TI), spending on health (HE) and spending on education (EE). In the long run both spending on health and education have positive effect on economic gross domestic product (GDP) per capita while Total investment have adverse impact on GDP. A percentage change in expenditure on health per capita will result on 0.1617% increase of GDP per capita. On the other hand result also revealed that a percentage change on expenditure on education (EE) per capita result in 0.186% increase in the GDP per capita while a percentage change on the total investment result in the 0.128% change in GDP per capital. Result from the long run relation which are restricted based on GDP per capital (independent variable) revealed that all three variables EE, HE and TI are relevant in predicting movement or changes on GDP per capital. Research Limitation: Result from this study would be widely useful if the sub variables measuring human capital development would have employed issues such as attributes, competences, knowledge as well as skills embodied on individuals which eventually enables someone’s creations, innovation as well as economic wellbeing. Practical Implications: Findings from this study would be useful for ministries responsible for the education and health while implementing the health and education policy of the country since the elasticity of the economic performance toward a unit change of the health and education expenditure is known. On the other hand policy makers could also set strategic health and education policies that ensure steady economic growth derived by human capital development. Originality: Previous similar studies conducted in Tanzania did not cover government spending on health as well as education (altogether) as key measures of human capital development, past studies also ignored total investment as the key intervening variable in economic growth. Therefore, compared to previous empirical studies, findings obtained broaden the thoughtful of the human capital development and economic development based on key relevant measures of human capital.