Decoding the Determinants of Human Capital Formation in Egypt: New Evidence from RALS-EG Cointegration Test and QARDL Technique

Abstract This study examines the distributional asymmetric effects of macroeconomic variables – per capita income, inflation, public education spending, domestic investment, and migrants’ remittances – on human capital formation in Egypt (1980–2023). Using the residual augmented least squares-Engle–Granger (RALS-EG) cointegration test and the quantile autoregressive distributed lag error-correction (QARDL-EC) model, the study explores short- and long-term dynamics across quantiles. Main findings indicate substantial distributional asymmetries: inflation and per capita income exert a pronounced impact on human capital at extreme quantiles, whereas their impacts are minimal at median quantiles. Domestic investment demonstrates no influence; however, remittances reveal a cumulative effect that becomes detrimental at high quantiles, indicating possible “brain drain” externalities. Public education expenditure exhibits significant distributional imbalance, highlighting inefficiencies in resource distribution. The study concludes that enhancing the efficiency of public education expenditures is more imperative than augmenting budgets. Furthermore, remittances must be purposefully allocated to productive expenditures, including vocational training, technology-oriented research and development, and skill enhancement, to alleviate negative impacts. It is essential aligning growth-oriented policies with macroeconomic stability measures, such as inflation targeting, for sustainable human capital development. This study innovatively constructs Egypt’s quantitative human capital index with Kraay’s (2018. “Methodology for a World Bank Human Capital Index.” In World Bank Policy Research Working Paper No. 8593 . Washington: World Bank) approach, providing new perspectives on human capital development in emerging economies.