The relationship between financial development indicators and human capital in Iran

Abstract

Human capital is considered as one of the major factors to promote economic stability, especially in developing countries. Furthermore, one of the most important factors in developing human capital is taking the advantage of facilities and economic capabilities in education. Development of financial system provides such abilities for the prospective countries. This paper studies the influence of financial development on human capital in Iran over the period 1977-2010 with the application of a VAR model. The results indicate the cash flow in Iran has a negative effect on human capital, which is the main cause of the increase in inflation. Education is a long term investment and when inflation hikes, people switch to alternative investments. However, the facilities provided by the banking system has negative effect on human capital due to the lack of the best financial resource allocation. However, since most of university graduate students in Iran practically have adequate skills and education, they do not have enough capital to start a business. Providing financial assistance for the private sector can lead to a business in which they can use their skills and education towards promoting production. Financial development could only slightly contribute to human developments.