Impact of Human Capital on Economic Growth.

A case study of
Pakistan.

Introduction:
There is a consensus among economists that countries with more natural resources have
the tendency to develop more as compared to other countries having fewer resources
(NRGI Reader). The natural resources alone cannot add to the economic growth but they
can only be useful when collaborated with human capital. Certain theories related to
growth have shown that human capital is important for economic development. Education
and health are the central figures of human capital as they help contribute more in
economic development. However, there are other factors which play pivotal role in human
capital. Human capital plays an important role in the economic development of a country.

Uzawa (1965) and Rosen (1976) also stress the importance of human capital in driving
economic growth. Nelson and Phelps (1966) said that the ability of nation to adopt and
implement new technology from abroad is function of its domestic human capital stock.
Recent models of economic growth such as Romer (1986) and Lucas (1998) emphasize
that investment in human capital an important factor contribution to economic growth.

With all the positive effects of human capital on economic growth there is no special
attention given to this sector. The expenditure on education sector of Pakistan is just 2.3%
of GDP (human developing report, 2007-2008) which is very low as compared to other
neighboring countries (World Bank report).

Similarly, the health sector gets only 2.7% of GDP (World Bank Report) resulting into
poor health conditions nation-wide due to which Pakistan is ranked highest among
countries with highest infant mortality rate and other diseases like malaria, polio and
tuberculosis.

Figure 1 shows the data of Pakistan’s spending on education as a percentage of its GDP
from 1998 to 2012. According to World Bank, in 2010 the spending was 2.37% of the
GDP which decreased by 2.2% and 2.1% in 2011 and 2012, respectively. The
international standard for education allocation is 4% but still there was no increase in this
ratio in Pakistan in 2013 and 2014.

The GDP spending on health by government of Pakistan is just 2.7% (as per 2012
statistics) for such a large population of 184 million (World Bank data, 2013). Due to this
small number of spending on such important factor like health diseases like polio which
is non-existent in the world is still a problem in Pakistan. Government should provide
necessary tools for children and women at the time of birth as infant mortality rate stands
highest in the world for Pakistan.
Economic growth can be achieved by giving enough attention to these two important
factors. By mentioning the factors like health and education the attention of policymakers
will surely divert towards the importance of human capital and its contribution towards the
economic growth.

In majority of the studies economic growth is related to human capital and human capitals
main tool is education. In this regard education serves as a social tool which modifies the
living standard of the society as a whole and personally too. In addition, abundance of
natural resources is of no use if there is no skilled and educated labor available to operate
and get the best out of these resources. In this respect, the increase in

Education level has a positive effect on total output by contributing the accumulation of
human capital and increasing the quality of the labor force (Cakmak, 2008; Yalcinkaya
and Kaya,)

Literature Review:
Akram (2005) explains that education is being focused more as compared to the health
in human capital. Health plays an important role in the national output as it is directly co
related with labor force. According to some World Bank reports health sector was ignored
by the government due to which Pakistan was always ranked lowest among all the
countries in the human development index.

Khan (2005) explains without ignoring other determinants that health and education are
important determinants as compared to the other determinants. He said Pakistan is
progressing at a respectable speed but some other south Asian countries are ahead of
Pakistan in this regard

Abbas and Nasir (2001) in there paper did a comparison between Pakistan and Sri Lanka
regarding human capital and economic growth and found a positive relationship in the
long run but negative relation in the short run. These results were due to the persistent
increase in the population. He said that emphasis should be more on the basic education.

Al-yousif (2008) H studied that expenditure on education contributes more to the

economic growth and human capital acts as a catalyst for the economic development and
works as an input just like factors of production. The results showed that every country
has its own reasons for economic growth and that human capital variables cannot be
standardized across all countries.

Qadri and Abdul Waheed (2011) found similar conclusion in the context of Pakistan using
time series data for 30 years time period. He concluded that human capital has a positive
relationship with economic growth and that education has an important role in building
human capital. Therefore, the government should pay more head to education and health.
Shehzad (2004) attempted to identify mortality reducing techniques which were used by
countries lower in per capita income than Pakistan. He concluded that this problem of
infant mortality rate can be reduced by just simply educating women.

Amjad (2005), in his study on the cotton industry of Pakistan, investigated the relationship
between human capital and economic growth .He concluded that our workers are not
skilled enough to compete in the international market. Old equipments and techniques
should be replaced for better economic growth. They need to put more effort in building
human capital into a real fruitful force if they are to compete in the international market.

Mehraha and Musai (2013) in their paper investigated the relationship between education
and economic growth as education produces a multiplier effect in the economic growth.
Result showed a strong relationship between education and economic growth.

Keller (2006) analyzed the impact of primary, secondary and tertiary education on
economic growth in Asian countries in panel data analysis using data from the period of
1971-2000. The number of primary, secondary and tertiary enrollment rate, the share of
government expenditures on education in GDP and public expenditures per student are
determined as independent variables. As a result of the research, it was observed that
expenditures especially on primary education had positive effects on economic growth.
Moreover, it has been found that the rate of secondary school enrollment positively affects
economic growth.

Aghion et al. (2009) show that encouragement in higher education has contributed more
towards economic growth of advanced countries as compared to the developing
countries. The growth of advanced countries has been recorded at rapid pace when they
invest in higher studies along with the new technology. The results of these study show
that the contribution of human capital in economic growth is greater than the physical
capital (Romer, 1996, Chen and Hiau, 2005, Fleisher et al, 2010, and Pelinescu, 2014).

In the context of Pakistan, numerous studies have been conducted to analyze the role of
educational level on economic growth. Husain et al. (2015), Ali et al. (2012), and Jaleel &
Idrees (2013) studied the long run relationship between the human capital and economic
growth of Pakistan using time series data varying for every study. The result of these
studies validates that there is strong role of human capital on economic growth.

Behrman et al compares the private and social return of low primary schooling with high
quality schooling in rural areas of Pakistan. The results show that the rate of return to high
quality schooling is 13% greater than the low quality schooling. However, the return of
low quality schooling to no schooling is approximately equal to 18.20 and 20.5
respectively.

3. Methodology
To investigate the relationship between human capital and economic growth, different
variables will be use. For measuring education, the study uses one category of primary
enrolment, whereas for health, two indicators will be use, i.e. infant mortality rate and birth
rate. Physical capital will be used as another independent variable. The data will be taken
from World Bank and State Bank of Pakistan for the time period 1972 to 2013.

3.1. Description of Variables

3.1.1. Gross Domestic Product (GDP)

It calculates the overall production of goods and services in a country in a given year. It
is a gauge of economic growth of a country. In this study, GDP per capita acts as a
dependent variable. This proxy is borrowed from Afzal (2010) and Akram (2008).

3.1.2 Primary Enrolments (EDU)

It is measured by the ratio of total number of students enrolled in primary schools divided
by total population of that age bracket (5 to 10 years). This proxy is borrowed from
Mehrara (2013) and Al-Yousif (2008).

3.1.3. Infant Mortality Rate (IMR)

It is measured as the number of infant deaths per 1000 births. Infant mortality rate is the
proxy for health which we have borrowed from Shehzad (2004) and Ali et al. (2012).

3.1.4. Physical Capital (PC)

It represents the factors of production. Physical Capital is also known as fixed capital
formation. We have borrowed proxy for this variable from Abbas and Foreman-Peck
(2008) and Iqbal (2009).

3.2. Empirical Model

The empirical model will be.

GDP= (PC, IMR, EDU)

4. References
1. Al-Yousif, Y. K. (2008). Education expenditure and economics growth: Some empirical
evidence from the GCC countries. The Journal of Developing Areas, 42(1), 69-80.
2. Abbas, Q., & Nasir, Z. M. (2001). Endogenous growth and human capital: A
comparative study of Pakistan and Sri Lanka. The Pakistan Development Review, 39(4),
451-473.

3. Khan, M. (2005) Human Capital and economics growth in Pakistan (Distinguished

Lecture). The Pakistan Development Review, 44(4), 445-478.

4. Akram, N. (2008). The long term Impact of health on economic growth in Pakistan. The
Pakistan Development Review, 47(4), 487-500.

5. Afzal, M. (2010). Relationship between school education and economic growth in

Pakistan: ARDL bounds testing approach to cointegration. Pakistan Economic and Social
Review, 48(1), 39-60.

6. Amjad, R. (2005). Skills and competitiveness: Can Pakistan break out of the low-level
skills trap? The Pakistan Development Review, 44(4), 387-409.

7. Qadri, F. S., & Abdul Waheed, W. (2011). Human capital and economic growth: Time
series evidence from Pakistan. Pakistan Business Review, 1, 815-833.

8. Mehrara, M., & Musai, M. (2013). The relationship between economic growth and
human capital in developing countries. International Letters of Social and Humanistic
Sciences, 5, 55-62.

9. Abbas, Q., & Foreman-Peck, J. S. (2008). Human capital and economic growth:
Pakistan 1960-2003. Lahore Journal of Economics, 13(1), 1-27.

10. Shehzad, S. (2004). How Can Pakistan Reduce Infant and Child Mortality Rates? A
Decomposition Analysis. Sustainable Development Policy Institute.

11. Aghion, P, Boustan, L, Hoxby, C, Vandenbussche, J 2009, The Causal Impact of

Education on Economic Growth: Evidence from US, viewed August 2016.

12. Barro, RJ 1992, Human capital and economic growth, Proceedings, Federal Reserve
Bank of Kansas City, pp. 199-230.

13. Behrman, JR, Ross, D and Sabot, R, 2008, “Improving Quality Versus Increasing the
Quantity of Schooling: Estimates of Rates of Return from Rural Pakistan,” Journal of
Development Economics, 85(1-2), pp.84-104.

14. Jalil, A & Idrees, M 2013, Modeling the impact of education on the economic growth:
Evidence from aggregated and disaggregated time series data of Pakistan, Economic
Modelling, 31, pp.383-388.