THE MODERATING ROLE OF FINANCIAL DEVELOPMENT IN THE HUMAN CAPITAL–GROWTH NEXUS: EVIDENCE FROM MIDDLE INCOME COUNTRIES

Abstract

This study investigates the moderating role of financial development in the relationship between human capital and economic growth in middle-income countries. Using panel data from the World Development Indicators (WDI), the study employs Ordinary Least Squares (OLS), Fixed Effects (FE), Random Effects (RE), Structural Equation Modeling (SEM), and MEDSEM analysis. Human capital is measured through a PCA-based Human Capital Index (HCI) and the World Bank Human Capital Development Index (HCD), while financial development is proxied by domestic credit to the private sector. The findings reveal that both human capital and financial development positively and significantly influence economic growth. The interaction term between human capital and financial development is also positive and significant, indicating that financial development strengthens the growth-enhancing effect of human capital. Furthermore, mediation analysis shows that financial development partially transmits the impact of human capital on economic growth. The study concludes that human capital and financial development are complementary drivers of economic growth and recommends simultaneous investment in education and financial sector development to achieve sustainable economic growth in middle-income countries.