Human Capital and Per Capita Income Linkage in South Asia: A Heterogeneous Dynamic Panel Analysis

This study explores the linkage between human capital particularly life expectancy and literacy and GDP per capita in selected South Asian economies. The study uses annual panel data of Bangladesh, India, Nepal, Pakistan, and Sri Lanka for the period 2000-2016, published by the World Bank. It applies panel unit root test, Pedroni cointegration test, panel autoregressive distributed lagged (ARDL) bound test, and Dumitrescu-Hurlin panel causality test. The result from Pedroni cointegration test and panel ARDL bound test revealed that GDP per capita (LGDPC), life expectancy at birth (LEB), and adult literacy rate (ALR) have both long-run as well as short-run association. Dumitrescu-Hurlin panel causality test evidences bidirectional causality between LEB and LGDPC, ALR and LGDPC, and ALR and LEB. It means that life expectancy at birth causes GDP per capita, and increased per capita income causes life expectancy to rise through better health care. Adult literacy rate causes GDP per capita income positively; enhanced per capita income causes adult literacy rate to rise through spending on education. Lastly, literacy causes life expectancy through better job, higher earning, and healthier behavior, while life expectancy causes literacy through longer and better life, leading to more productivity and resultant incremental income enabling to spend more on education. Therefore, the policy makers of South Asian countries should promote further quality education and better health through human capital formation to achieve sustainable growth in per capita income.