Direct and indirect effects of human capital on structural transformation in Sub-Saharan Africa mediated by institutional quality

The contribution of human capital development in economic transformation and the Sustainable Development Goals is well documented. However, little is known about the mechanisms by which human capital can drive structural change, particularly in the institutional context of SSA. Hence, the main objective of this study is to examine the dual role of human capital in fostering structural transformation, considering institutions as mediating channels in SSA. We have used a panel dataset of 43 Sub-Saharan countries, spanning from 2000 to 2022. To test the direct and indirect pathways, we used observed variable path analysis (OVPA) technique within a mediation framework. The mediation models were estimated using the maximum likelihood (ML) approach with bootstrapped standard errors (1000 replications) to obtain robust confidence intervals for indirect effects. The findings show that human capital not only directly affects economic transformation (0.269, p < 0.001) through labor productivity and innovation but also plays a more fundamental indirect role (0.195, p < 0.001) by fostering favorable institutional environments. The indirect pathway accounts for about 42% of HC's total effect on structural change, with 58% attributable to the direct effect. What we find agrees with endogenous growth theory, which posits that human capital is relevant to productivity and innovation, and modernization theory, which posits that social-economic development, including human capital development, is important to institutional development. Therefore, policymakers should consider human capital development as a core strategy for structural change, given its dual role in directly improving economic outcomes and indirectly fostering institutional progress.