Governance Thresholds and Human Capital–growth Nexus

Abstract: This paper contributes to the recent debate about the relationship between human capital, governance and economic growth. In particular, we try to analyze whether the growth effects of human capital depend upon the level of governance. We employ a large panel data set of 135 developed and emerging economies over the period 1996-2014. Using an innovative threshold model and system-GMM approach, we find that there is a threshold effect in human capital- growth nexus. Our findings show that the relationship between human capital and economic growth is non-existent up to a certain threshold level of governance, however, the relationship becomes positive and significant once the threshold level has been achieved. Therefore, better governance is complementary to make a productive use of human capital in achieving higher growth. Our results show that human capital – growth nexus is contingent on the level of governance, thus accumulation of human capital stock is effective in achieving higher economic growth and economic development.