Human Capital Components and Economic Development: The Relationship between Education and Health Expenditures and GDP in Selected Countries of Southeast Europe

Abstract

The modern theory of economic growth and development posits that human capital is one of the main  factor for economic growth as it enhances the productivity of two other classical growth factors: physical capital and labour. Also, investments in human capital accumulation are considered as important precondition for achieving higher levels of economic development. In this context, one line of emprical research is to assess the importance of the two components of human capital – education and health – in the process of economic development. In this paper, we investigate the impact of education and health on the level of economic development (measured as GDP per capita) in a sample of five Southeast European countries (Albania, Croatia, North Macedonia, Serbia and Slovenia, over the period 2000-2021.The empirical analysis relies on a cross-sectional regression using two panels (one for education - based human capital, and the other for health-based capital. Other variables in the models include lagged GDP per capita, gross fixed capital formation per capita and corruption perception index as a proxy for insitutional quality. The results from the two panel regressions indicate that spending on education and health has significant positive effects on GDP per capita. Such reserach results lend support to the policy prescription that public investments in education and health aimed at upgrading the quality of human capital may significantly contribute to the process of economic development.