A causality analysis between human capital and technology change in Albania

AuthorLorena Alikaj - Arsena Gjipali
PositionIsmail Qemali University, Vlora, Albania - University of Tirana, Tirana, Albania
Pages16-31
Vol. 2 No. 2
June, 2018
European Journal of Economics, Law and Social Sciences
IIPCCL Publishing, Graz-Austria
ISSN 2519-1284
Acces online at www.iipccl.org
16
A causality analysis between human capital and technology change in
Albania
MBA. Lorena Alikaj
Ismail Qemali University, Vlora, Albania
Assoc. Prof. Arsena Gjipali
University of Tirana, Tirana, Albania
Abstract
Following a long period of high economic growth, in the last quarter of 2008 the Albanian
economy slowed down – and this trend has continued up to now. To achieve the previous
performance Albania needs a new economic model – investing heavily in technology adoption,
innovation and human capital (Fullani, 2012). Economists have suggested various channels
through which human capital can a ect economic growth. The rst channel is when human
capital is a direct input in the production function and the second channel is when the human
capital a ects the technology change parameter. So, it is clear that a lack of educated people
may reduce economic growth, but it is unclear whether a more educated workforce will cause
economic growth in Albania. In this paper, we have investigated a causality relationship
between human capital and technological change in Albania for a period of 32 years from 1983
up to 2014, through the application of Engle and Granger (1987) co-integration technique and
by using the Vector Error Correction Method. The results of the Engle and Granger (1987) co-
integration test indicate that a long run relationship exists between gross enrolment rates in
higher education (a proxy for human capital) and TFP (a proxy for technological change) in
Albania. Policy implications arise as to the importance of human capital deriving from the role
of gross enrolments rates in higher education to TFP in the long run equilibrium.
Keywords: economic growth, higher education, TFP, Granger causality, VECM.
Introduction
Throughout the 20th century, extensive literature has been produced about the role of human
capital and technological developments in determining economic growth. Most of the latest
studies deal with the empirical testing of this relationship, and most of these empirical works
are based on cross-data of developed and developing countries, while limited literature is
found for a single country (Oladoyin 2010). Most of the studies con rm that only a limited
part of economic growth can be explained by the accumulation of production factors, such
as physical capital and working hours of the labor factor. The unexplained part of economic
growth, such as Total Factor Productivity (TFP), is widely accepted as a key factor of the
economic growth (Easterly and Levine, 2001; Bosworth and Collins, 2003).
The traditional measure which is widely used in the literature to measure the
contribution of technological change to economic growth is represented by Total
Factor Productivity (TFP) (Kahn and Lim, 1998). The empirical literature points out
that the high growth in Asian Tiger countries, such as the People's Republic of China
and India, can be explained by the steady growth of TFP. Bulman et al. (2014) and
Jitsuchon (2012) argue that countries that managed to successfully overcome middle
European Journal of Economics, Law and Social Sciences
IIPCCL Publishing, Graz-Austria
Vol. 2 No. 2
June, 2018
ISSN 2519-1284
Acces online at www.iipccl.org
17
income levels had relatively high TFP growth. Tran (2013) argues that middle-
income countries should complete “orientation or direction from increasing output
factors toward TFP growth orientation”. Benavot (1989) also argues that the main
contribution of human capital, which is generally o en measured in terms of the rate
of enrollment at school to the incremental process, is to increase the level of cognitive
skills owned by the workforce, and as a consequence, improves productivity in
general and should therefore be a ributed to TFP. Hence, we sum up that the human
capital measured by education is an important factor of economic growth.
Over the last 25 years the Albanian economy has undergone signi cant structural
changes, which have strengthened economic incentives and fuelled economic growth.
Growth accounting analysis by Kota (2009) suggests that capital stock has played
an important role in economic growth only a er 2000, with TFP continuing to be an
important determinant of economic growth. Following a long period of high economic
growth, in the last quarter of 2008 the Albanian economy slowed down – and this trend
has continued up to now. Therefore, in order to gain a be er understanding of economic
growth in the long run, we will focus on TFP behavior, as being argued to be a crucial
determinant of long-run economic growth. To achieve the previous performance Albania
needs a new economic model – investing heavily in technology adoption, innovation and
human capital (Fullani, 2012). While it is evident that a lack of educated people may slow
down the economic growth, it is unclear whether a more educated workforce will trigger
the economic growth. Questions such as: does higher education increase productivity,
is it important and in what ways it is important, are some of the issues that do not have
a clear and accurate answers and have not been previously evaluated for Albania. This
paper is organized as follows. Next section lays down the main research hypothesis to
be explored in this research work. Methodology is explained in details in Section three.
Section four brings the results of the empirical analysis. Section ve concludes.
Research Hypothesis
The purpose of this research work is to examine the dynamic relationship between
human capital and technological change in Albania. To achieve this goal we have
formulated two hypotheses. These hypotheses reveal the relationship between gross
enrollment rates in higher education and TFP in Albania. Based on our current
knowledge, there is no genuine study in the literature that has examined the dynamic
relationship between gross enrollment rates in higher education and TFP in Albania.
According to the empirical framework and based on implications of endogenous
growth theory, Granger's causality relationship may exist between human capital
and technological change and the causality-e ect can be derived either from human
capital to technological change or from technological changes to human capital. From
the theoretical point of view there is no consensus about the relationship between
human capital and technological changes. Therefore, the underlying hypotheses that
we are going to test in this study are:
H1: There is a signi cant long-run relationship between the gross enrolment rates in higher
education and TFP in Albania.
H2: There is an important causality relationship between the gross enrolment rates in higher
education and TFP in Albania.

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