HUMAN CAPITAL DEVELOPMENT INSTITUTIONAL QUALITY AND SERVICE SECTOR PERFORMANCE IN NIGERIA

ABSTRACT

This study empirically examines the impact of human capital development and institutional quality  on  service  sector  performance  in  Nigeria.  For  the  purpose  of  this  study,  the autoregressive distributed lag (ARDL) method was employed based on data from 1981 – 2019. Empirical result show that human capital development had a positive and statistically insignificant impact on theservice sector in the long and short-run. It was also found that institutional quality had positive and statistically insignificant impact on the service sector in the long and short-run.The study recommends that the policy authority should devote more emphasis to the development of human capital in order to expand service sector. Institution development policies should not be sorely on corruption control alone, also bureaucratic quality and democratic accountability achievement targets. They have to complement one another to significantly affect the service sector.

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

The service sector has been identified as a sector with the potential to drive growth. The success story of Asian economies epitomizes the service-led growth model (Ghani & O’Connell, 2014; UNCTAD  2015).  Since  Nigerian  returned  to  democracy  in  1999,   there  has  been  an unprecedented growth, averaging nearly 7% from 2001-2011 and over 6% up till 2014 (African Development Bank, 2011). However, economic growth has experienced a significant downturn, falling drastically to 2.7% in 2015 with the economy officially falling into recession in 2016 (World Bank, 2017). Nevertheless, the economy has been confronted with numerous challenges like poor infrastructure, widespread insecurity and youth unemployment. This mantra saw the nation looking for wider alternatives in income, output and trade sources, mainly from other sectors. Much of the argument on low-income country’s economic transformation has focused on a shift from agriculture to manufacturing but this fails to recognize and appreciate the role services can play (Timmer, 2010).

Rodrik  (2015)  clearly  noted  that  developing  countries  have  less  scope  to  industrialize  and develop on the basis of manufacturing. In this thought, a well-functioning service sector is considered  important  for  the  overall  economic  performance  of  African  economies,  and  the welfare  of  its  citizens.  Besides,  a  more  productive  service  sector  also  strengthens  the performance of other sectors such as manufacturing sector (Khanna, A., Papadavid, P., Tyson, J.,

&Velde, D. W., 2016). In particular, knowledge-intensive business services literature shows that the services sector influences the innovative capacity of the industry and hence the growth potential of the economy (Miles, 1995; Miles, 2008; Hertog, 2000. Muller, 2001 &Czarnitzki,

2000).

The  service  sector  contributes  significantly  to  GDP  and  provides  input  for  the  rest  of  the economy, hence largely affecting the overall investment climate (Isu & Okpara, 2013). for instance in 2016,the service sector contributed 59.79%, also the GDP of 2017, 2018 and 2019

shows the service sector contribution to be 55.8%, 52.02% and 49.73% of the GDP. Also, some services serve as cardinal input to other businesses, like financial services; which accelerate transactions and provide access to credit to finance investment. Education, health and sanitation services contribute to a healthy well trained workforce while legal and accountancy services which are parts of the institutional framework required to support a healthy market economy. These services are pertinent in achieving social development objectives.

Services have the potential to provide many jobs for the poor (from distribution to tourism), form the backbone of the economy (from transport to finance, electricity and telecommunications), offer an opportunity to diversify and enjoy comparative and competitive advantages (from temporary migration to call centers). This has guided some suggestions that services could be a progressive course towards growth and an engine of transformation (Ghani & Connell, 2014). So the key question is what determines a country’s service sector performance?

Some pundits have argued that since the output of the service sector comes from knowledge and know-how of the people, there is a need for countries to have an appropriate level of educated and  skilled  workforce  because  people  need  education  and  new  skills  to  adopt  modern technologies (Kloosterman C., Beerepoot, N., & Lambregts, B., 2015). Human capital development is crucial in promoting the growth of technologically sophisticated service sector because the qualitative aspect of people is in the scope of labour, capital and service delivery (Kucher,  2007).    Consequently,  changing  the  endowment  structure  in  the  economy  will determine  the  evolution  of  the  service  sector.  These  developments  have  demonstrated  the increase in demand for human intelligence.

Human capital according to the Organization for Economic Co-operation and Development (OECD), is the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods and services or ideas in market circumstances. Movement in the HDI is driven by changes in health, education and income.

According to the Human Development Report Office (2018), the human development index (HDI) increased from 0.465 in 2005 to 0.532 in 2017, this means only 14.4% increase in a space of 12 years. In 2012, Nigeria ranked 156 out of 187 in terms of HDI, with a line value of O.459.

Progressively, HDI in 2015 ranked Nigeria as 152 out of 187 with a value of 0.514, most recently in 2017, the ranking declined to 157 out of 187 though with a slightly increased line value of 0.532 which still puts the country in the low human development category and below the average of 0.537 for countries in Sub-Saharan Africa. The slow and inconsistent movement of the HDI has been amongst other factors, associated with paltry budgetary allocation to the educational and health sector.

In the mid-1970s, the government of Nigeria lunched universal primary education (UPE) where education at the primary level was free; but due to some inadequate needs assessment, in terms of increased turn out of school pupils, manpower and infrastructure, the programme gradually dies natural death. UPE, has since been replaced with the Universal Basic Education (UBE) programme (Gusau, 2008). The government although has special arrangement for the UBE programme through budgetary allocation to education and private collaborations, it is observed that education funding has not gone beyond 14% of the total budget. The funding of education in relation to the total budget allocation was 3.8% around 1990, ten years later in the year 2000, the funding of education rose to 12.5%, and in recent times 6.01%, 6% and 7.04% of the national budget has been allocated to education in 2016, 2017, 2018 respectively, (Bugdet report, 2018).

The Nigerian government has adopted several programmes and policies in the past apart from universal primary education and universal basic education discussed above, those policies included the following, national commission for mass literacy and non-formal education, family support basic education program, universal basic education, national economic empowerment and development strategy, universal basic education, and so on. These policies and programs are with particular emphasis on improving human capital development.

In  the  area  of  health  also,  Nigerian  government  has  also  initiated  various  policies  and programmes such as national health policy, national health financing policy, national health bill, national strategic health development plan, Nigerian health insurance scheme, and so on. The objective of these policies and programmes is to increase the quality of life of people, satisfy human needs and train individuals to meet the degree of complexity and sophistication of service demands (Awokoya, 1981).

In the midst of an inappropriate institutional setting, the realization of the full benefit of even the best quality human capacity would be illusory (Aluko and Aluko, 2019). This means that for there to be competent service providers, a product of our educational institutions must be sufficiently skilled, empowered and supported by enabling policies and operating environment. The good institutional framework creates a conducive environment for human capital to thrive, increasing productivity of the service sector and thus, enhancing economic growth (Stern & James, 2018). Quality institution ensures rational distribution of health and educational services as well as infrastructure. Good health is a necessary condition for school attendance since a child has to be healthy to endure the rigorous activities in school. Also, a healthy student in contrast to their less healthy counterpart have lower malingering and higher cognitive functioning and thus receive a better education for a given level of schooling which in turn guarantee better service delivery in any field of endeavor.  Sound health enhances labour productivity in terms of service delivery,  physical  and  mental  abilities.  All  things  being  equal,  it  is  presumed  that  healthy workers work harder and longer and reason more plainly than those who are less gifted with good health.

In  Nigeria,  the  extant  literature  has  attributed  the  underdevelopment  of  institutions  to  the resource curse, ethnic fractionalization, social-political competition, lack of control of corruption (Slab, 2008). The weakness of the Nigerian institution has contributed directly and indirectly to underdevelopment of the service sector and low human capital formation respectively.   In the

1970s and 1980s, during the period of the global oil boom, weak rule of law matched with the high level of corruptions amongst the leaders saw the increased incentive for economic rent from oil which contributed to utter dependence in oil and outright neglect of other sectors of the economy such as the service sector.

In addition to this, economic and political instability at that time due to coups scared private investors who had the potentials of investing in the service sector. Ethnic fractionalization led to the lopsidedness in the allocation of the capital project which directly affects human capital formation. Owing to the potentials of the service sector, the Nigerian government, has over the years  engaged  in  different  strategies,  programmes  and  policies,  as  well  as  institutional mechanism, conceptualized to fight against service failure by ensuring that organs of government in Nigeria deliver to citizens and other residents in the country the services to which they are

entitled to. Such institutional framework is the service compact with all Nigerian otherwise known as servicom. Established in 2004 by the Nigerian government to coordinate the effort of the Ministries, Departments and Agencies (MDAs) to develop and implement quality services and also carry out independent surveys on customer satisfaction on public services.

Studies have shown that human capital exact influence on service sector performance through the lens of a strong institutional framework. Marta and Adelaide (2013) synthesized the complementary impacts of human capital and institutional quality on service sector productivity and expansion and found that developed human capital brings about growth in the services sector given a strong institutional setting. This work takes the human capital-institutional complementarity identified by Simeos and Daurte (2013) and examines whether this complementarity exerts itself in the process of improving service sector performance in Nigeria.

1.2       Statement of Research Problem

The Nigerian service sector has been able to display impressive results despite tough economic circumstances. In 2014, Nigeria’s rebased Gross Domestic Product sectoral contribution shifted towards service sector and away from the oil sector. The service sector accounted for 54.8% of the rebased GDP and of 2015, service sector contribution to Nigeria’s GDP stood at 58.12% and even increased to 59.79% in 2016. This has made it clear that the service sector has the potential to  be  a  growth  escalator  and  an  engine  of  transformation  (Ghani  &  Connell,  2014). Unfortunately,  the  service  sector  is  saddled  with  many  challenges  ranging  from  internal weakness to external challenges that affects and influence the performance of the sector. The success of any investment as well as growth of any industry depends on human capital. The service sector of Nigeria has been identified to lack human capital preventing the sector to grow significantly and contribute meaningfully to national development. Buera and Kaboski (2015) argued that the hindrance to high service sector performance is low human capital since the output of the service sector comes from knowledge and know-how of the people.  The growth and development of human capital is determined by changes in health, education and income. In Nigeria, the slow and inconsistent movement of the human development index (HDI) has been associated with meager budgetary allocation to the education and health sector.

The African Union (AU) health funding commitment of 15% of the budgetary allocation to health has never been reached. The highest percentage since the declaration was in 2012 when

5.95% of the budget was allocated to health. In the recent time, health took about 4.23% of the budget in 2016, 4.16% in 2017 and 3.9% in 2018 (budget report, 2018).

The Nigerian government has adopted several programmes and policies since the 1970s with particular  emphasis  on  improving  human  capital.  The  objective  of  these  policies  and programmes is to increase the quality of life of people, satisfy human needs and train individuals to meet the degree of complexity and sophistication of service demands (Awokoya, 1981). Unfortunately, in spite of all government effort through their various policies and programs, it has been observed that education and health sectors have been underperforming so far, due to either poor funding, implementation or other institutional factors.

From the general problem of poor funding and policy implementation common to most third world countries in these sectors, lack of political will has been identified as one factors inhibiting the service sector performance in Nigeria. This is perhaps caused by instability of government or lack of continuity of government. For instance, Nigeria has had fifteen heads of state in 59 years out of which six were democratically elected, others came in through military coup. This shows that leaders have never had enough time to draw up plans before drafting themselves into leadership.  So  education  and  health  policies  were  formulated  by  various  governments  but political instability stalled and discouraged the political will to implement such policies. Continuity in policy could not be guaranteed as new government came in.

Also, corruption has contributed to stagnate the development of human capital and service sector in Nigeria. Some good health and educational policies have been put in place in the past. The design of the policy from all intent and purpose were quite visionary. The objective of most policies in Nigeria are often derailed at the implementation stage due to a number of reasons. The budget for the implementation of policies are often passed with strings attached. The paltry funds often allocated to health and educational operators are not honestly and fully utilized to promote the course of education and health. Some of these resources are diverted to serve personal interest. Since the establishment of democracy in 1999 the state of education and health has  further  deteriorated.  The  democratic  government  has  even  underperformed  in  terms  of

meeting up with UNESCO benchmark on education and AU funding commitment on health. World Health Organization (2017) has also rated Nigeria as the 187th out of 191 countries with the worst health care delivery and the third highest infant mortality in the world.

Nigerian government needs to invest more in education and health. This is because a more educated and healthy person has a wider range of services to render, he is less dependent on a specific job (‘this is often called ‘job security’) such a person, however, is much more adaptable and  thus  the  possibilities  of  potentially  acceptable  job  offers  are  extending  (employment security) this means a permanent (or at least long-term) involvement of a person in the work environment (Brožová, 2018). In this regard, the need for developing countries to actively invest in education and human capital formation to enhance their development has been stressed (Hanushek,  2013;  Austin  G.  2015;  Atiqurrahman&  Zaman,  2016;  Nabi  et  al.,  2011). Performances of service sector has also been greatly affected by institutional factors. Owing to the nature of services – which are commonly characterized by elements of natural monopoly, high barriers to entry and information asymmetries.

Regulation is required to ensure that service markets work properly. Unfortunately, due to poor regulatory environment in Nigeria, the authorities in this field has been unable to create a level playing ground and facilitate competition between market players (e.g. access to grid or network for new entrants in the electricity or telecommunication sector), quality of the services are not guaranteed, no adequate access to services (such as electricity, health and education). Corruption and Instability in the economic and political space in the 1970s and 80s’ saw the increased incentive for economic rent from oil which has led to a massive death in the other aspects of the economy such as the service sector.

Up till date there has been no significant improvement in the quality of Nigeria’s institution. The indicator of political stability as measured by world governance index has experienced a 75% drop as compared to its value in 1996. This suggests that the political atmosphere is currently more susceptible to a break down due to violence than in 1996. The control of the corruption index suggests that there has been a mere 12% improvement in the control of corruption metric as estimated by the World Bank Indicator from 1996 to 2016. This suggests a mediocre improvement in the fight against corruption in Nigeria. There is need to put more effort in

fighting against corruption because corruption is a major societal challenge in Nigeria, it distorts market  competition,  breeds  cynicism  among  citizens,  undermines  the rule of law,  damages government  legitimacy,  and  corrodes  the  integrity  of  the  public  and  private  sector  and discourages  human  capital  development.  If  the  institutional  setting  in  a  country  is  not appropriate, the realization of the full benefit of even the best quality human capacity would be illusory.

Studies of Simeos & Duarte (2013), Acemoglu et al (2014), Roger (2008) have examined the impact of human capital development on economic growth, while others considered the impact of any of the factors such as education, health, school enrolment rate etc. on economic growth. Most of the studies were based on the impact of human capital development on economic growth or development. However, none of the studies has focused on the impact of human capital development on the service sector.  Also of the researches that were carried out on the effect of human capital development on economic growth and development, none of the works has considered institutional factors in the analysis.

It has, therefore, become an issue of concern to study the nexus between human capital development, institutional quality and service sector performance. There is a need to examine the extent to which the strength of Nigeria’s institution and human capital influence the service sector performance. If the issue of the underdevelopment of the human capital and weakness of the Nigerian institution is not properly handled, the service sector will continue to underperform which will also affect other sectors negatively.

1.3       Research Questions

Arising from the previous section, the study is motivated by the following research questions:

i.      What is the impact of human capital development on the service sector in Nigeria?

ii.      What is the impact of institutional quality on the service sector in Nigeria?

iii.       What  is  the  direction  of  causality  between  human  capital  development,  institutional quality and the service sector in Nigeria?

1.4       Objectives of the Study

The  broad  objective  of  this  research  work  is  to  examine  the  impact  of  human  capital development and institutional quality on the service sector in Nigeria. The specific objectives are:

i.   To estimate the impact of human capital development on the service sector in Nigeria. ii.  To determine the impact of institutional quality on the service sector in Nigeria.

iii. To ascertain the direction of causality between human capital development, institutional quality and the service sector in Nigeria.

1.5       Research Hypotheses

H01: Human capital development has no significant impact on the service sector in Nigeria

H02: Institutional quality has no significant impact on the service sector in Nigeria

H03: There is no causality between human capital development and service sector in Nigeria

1.6       Scope of the study

As regards the geographical scope of this work, the work will be centered on the Nigerian economy with particular emphasis on the service sector. The service sector as used here refer to the  sector  that  produces  intangible  goods  which  comprises  of  various  service  industries including   warehousing   and   truck   transportation   services, information   sector   services, securities and other investment services, professional, technical and scientific services, waste management services, health care and social assistance services, and arts, entertainment, and recreation services.

In terms of context, this research attempts to consider the effect of the following variables:

human capital development, institutional quality on the service sector. The period of 1981 to

2019 (38 years) will be covered in this study. The variables of interest include index of human

capital development, institutional quality –control of corruption, regulatory quality, government effectiveness and the service sector performance (output).

1.7       Significance of the Study

This study is relevant in so many ways. Firstly, it will be relevant in the sense that it will further the understanding of the concepts of human capital and institutional quality and its impact on service  sector  performance.  Secondly,  this  study  will  bring  to  the  consciousness  of  policy makers, the importance and need to have a quality regulatory body,  effective government, political stability and absence of violence in other to ensure that the service sector thrives. A well-performing service sector will likely influence various economic units both in the public and the private sectors of the Nigerian economy. This is because many services are key inputs to all or most other business. The emphasis and understanding of this study will help the authorities make sound policies that can boost the service sector performance. This study will also make prominent the potentials of the service sector as a way of diversifying the economy and reducing the overdependence on the extractive industry (oil and agriculture) and also as a key part of the investment climate. More so, this study will be of use to other researchers as a point of reference for further research studies.

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