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Investment in human capital


Politics & Piolicy 

By SYED Furqan Haider Shamsi
Oct 16 - 22, 2000

Investing in people, if done right,.... provides the firmest foundation for lasting development. — World Bank, World Development Report, 1991

Human Resources of a nation ultimately determine the character and pace of its economic and social development. Human resources constitute the ultimate basis for wealth of nations. Clearly, the nation that is unable to develop the skills and knowledge of its people and to utilize them effectively in the national economy will be unable to develop anything else. The principal institutional mechanism for developing human skills and knowledge is the Education.

Education is considered to be the major form of investment in human capital and serves as a key input in human capital formation. The more education, the more rapid the development. It is an activity that sustains and accelerates overall development. It improve the quality of manpower and it provides the skilled workers at all levels to manage the country's developing technology, capital services and administration, which ultimately lead the country to a comprehensive economic development. It not only raises the productivity and efficiency of individuals but also improves the quality of their life by enhanced earnings. In fact, the educational systems of third world nations strongly influence and are influenced by the whole nature, magnitude and character of their development process.

Impressive statistics and numerous quantitative studies of the studies of the sources of economic growth in the west were paraded out to demonstrate that it was not that the growth of physical capital but rather of Human capital that was the principal source of economic progress in the developed nations. It is clear from the evidences that expansion of educational opportunities at all levels has contributed to aggregate economic growth by the agency of

• Creating a more productive labour force and endowing it with increased knowledge and skills

• Providing widespread employment and income-earning opportunities

• Creating a class of educated leaders to fill vacancies left by departing expatriates

• Providing the kind of training and education that would promote literacy and basic skills

Albeit, the evaluation of economic development and education can not be only looking at the aggregate growth but should also take into account the structure and pattern of economic growth and its distribution implications. Education is a major instrument for economic growth and social development but it contributes to economic growth but itself not generate growth.

It is the role of education that helps to overcome poverty, increase income, improve health and nutrition and control family size. Therefore, this suggests that the correlation of education of this investment in human capital with poverty and inequality exists.

Recent studies have demonstrated contrary to what might have been assumed, the educational systems of many developing nations sometimes act to increase rather than to decrease income inequalities. The basic reason for this perverse effect on income distribution is the positive correlation between level of education and level of lifetime earnings. The two fundamental economic reasons why one might suspect that many LDC educational systems are inherently snobbish are, first, the private costs of primary education (like the opportunity cost of a child's labour to poor families) are higher for poor students than for more affluet students. Second, the expected returns of primary education are lower for poor students. Together they mean that a poor family's rate of return from investment in a child's education is lower than it is for other families. This snobbish nature is even compounded at university levels where the government may pay the full cost of tuition and fees and grants income to students in the form of stipends.

Recent economic growth studies have listed human capital accumulation as a primary source of economic development. The results of cross country growth regressions show that once the starting level of real per capita GDP is held constant, the school attainment variables are significantly related to the growth rate of real per capita GDP (Barro and Sala i Martin- 1995).

Denison accorded education as one of the important determinant of economic growth. He made many attempts to find the relation between education and economic growth. He summarized as

• Education raise the quality as well as productivity of the labour

• The improvement in the productivity has made a large contribution in economic growth of United States of America.

Hick examined the relationship between growth and literacy as a measure of economic development and life expectancy. He confirmed the existence of relationship between economic growth and human resource development as measured by literacy rate and life expectancy. These variables like (i) Rate of investment (ii) Growth rate of imports (iii) Level of human resource development, affect or explained the variations in per capita growth in Hicksian Studies Easterlin (l981) examined the relationship between education and economic growth in 25 of the largest countries and concluded that spread of the technology of modern economic growth depended upon the greater learning potential motivation arising from the development of schooling.

The researches lead us to the conclusion that investment in education can contribute to economic growth but it is hardly to find the chicken and egg relationship between education and economic growth.

Indicators for Educational Progress and Pakistan Perspective

The data for the Indicators, as listed, below, for educational progress can be used to adopt such policies which will narrow down the gender differences, regional inequalities and class of differences.

1. School enrollment ratios

2. Literacy Ratios

3. Recipients of non-schooling education

4. School completion ratios

5. Rate of Return

6. Expenditure on Education

Enrollment rates refused to the fraction of school aged children who are enrolled in schools. These ratios show how many children have actually access to school. Further these ratios can be categorized on the basis of a) by level of schooling i.e. primary, secondary and higher education b) by sex c) by geographical location., how many are enrolled in different provinces d) by socio-economic status i.e. poor, rich, middle class etc.

Literacy ratios refer to the proportion of adults who can read, write and can perform simple arithmetics and these rates shows the cumulative acquisition of skills. Number of recipients of non schooling education implies those people who are involved in non formal education i.e. apprenticeship, adult education, on the job training etc. This indicator shows how many people have access to the opportunities outside the school but it is difficult to determine that who is recipient because it may be that outside school education is complement or substitute of formal education. School completion ratios indicate the fact that how much educated labour force existed, how many levels have been completed by labour force. It is limited to only formal schooling. Rate of returns shows that how much income has increased due to increase in education. The data on expenditure on education shows that how much private as well government budget has been spent on education. These expenditures depend upon their country's ability to pay.

Pakistan showing enviable rate of growth for most of last fifty years but the social sector development is particularly immeasurable. Around fifty per cent of the Pakistan's population is comprised of women, which certainly directs as a major reason of low social development as the status of women in the country is still poor. Table 2 depicts a comparison of Pakistan for few indicators of human capital investment and socio-economic development.

Table 1

Literacy and Socio-Economic Development


Public Expenditure
Education (% GNP)


Per capita
(US $)

. .









61M - 63F






62M - 64F



Sri Lanka



71M - 75F






58M - 58F



Source: World Development Report 1999/2000

Pakistan stands 31st out of 35 Muslim countries in literacy rate and globally Pakistan has been placed 134 out l86 countries. (World Bank Atlas 1996).

Table 2

Health Sector in Pakistan



Infant Mortality
Rate (per 1000)

Rate %

Pub. Expenditure
on Health
















Pakistan authorities more emphasis on the political instability as a reason for the poor performance of education sector can be put aside when another fact come into view that many poorer countries even suffering from internal war has doubled enrollment ratios than Pakistan. (Table 4).

Table 3

Enrollment Ratios

50%- 90%


Below 50%

Burundi          73%

Sri Lanka   87%

Pakistan         42%

Uganda          80%

Bolivia         85%

Afghanistan    24%

Bangladesh    77%

. Somalia          10%

Nepal            82%

  Mali               24%

Source: A World Bank Review (1995)


Table 4

Where do we stand amongst E-9 Countries


Literacy Rate (%) 1995



















The educational system of Pakistan confronted with all problems which can be found elsewhere in the world perhaps by few that are unique. Pakistan has inherited colonial system of education and thus possess all characteristics exist in that system. Low enrollment rates at primary level, wide disparities between regions and genders, lack of trained teachers, deficiency of proper teaching materials and poor infrastructure reflect the substandard state of education. Psacharopolous (1994) observed the social rates of return that they are higher at primary level than those at secondary level. The private rate of returns are, however, found to be highest at the tertiary levels.

According to World Declaration on Education for All made at Jomtein, Thailand in March 1990, as well as Summit Declaration on Nine Population Countries made at Delhi in December 1993, Pakistan is committed to achieve the following, by the year 2000;

1. Universalization of primary education.

2. Double the literacy rate viz. a viz. of 1990.

In the ultimate analysis, the failure to make primary education universal even after fifty two years is associated failure from feudal dominance in rural areas, the urban middle classes preemption of resources, huge level of defense spending and lack of sufficient demand for basic education specially for girls education. Inefficient use of resources has adversely affected the education system. Spending on high buildings has taken priority over number of teacher or other aids to education. Drop out rates is high. The increasing politicization of educational allocation especially under the democratic regimes has meant that the site selection for schools and hiring of teachers has not always been based on merit. Another underlying problem has been the higher education has continued to pre-empt a large share of public education expenditures.

Table 5:

Public Expenditure on Human Capital Investment

  Non-Plan Period
5th Plan
6th Plan
7th Plan
8th Plan
  Rs. b % Total Rs. b % Total Rs. b % Total Rs. b % Total Rs. b % Total

Education &

3.44  4.55 5.64  3.69 14.27   5.95 25.7  7.91 9.8 1.63

We must not forget that investment in education have social as well economic benefits like for example lower infant mortality rates of better educated mothers and that gains in income growth alone are a poor measure of overall development. In East Asian economies, education is also associated with improvements over time in the equality of income across households. These investments are associated with lower infant mortality, lower fertility and social benefits. These other benefits, social and distributional are as central part of the development process as income gains.

If we had not neglected education, not only the quality of life in Pakistan have been much better but every Pakistani would be enjoying a much higher standard of living. Though Pakistan has achieved some success in increasing the number of schools as well as the enrollment ratios, the drop out rate has not declined. The high drop out rate not only indicates the poor quality of education but also the primary cause of poor human resource development. The relative lack of female teachers causes the girls to be removed from the school due to the family characteristics of most of the Pakistan regions. There are large gender and rural imbalances both in availability and quality of education. The universities are faced with serious administration problems, large budget deficits, out model curricula and lack of focus on research. Therefore, what can be deduced from the above debate is that failure of the previous plans were due to the tendency of setting unrealistic and unattainable goals and objectives. Required is the participation of private sector and community groups together with government sector. Government should look for the reduction of gender gap i.e. improving the quality and quantity of education for girls. Non-formal education can play a significant role in bridging literacy gap. Improvements in the teacher's training programme to enhance the quality of education. Let me summarize the priorities for the enhancement of education as follows:

• Stress should be laid on primary education The reason being that rate of return on primary education is higher than tertiary levels. It also tends to redistribute resources towards poor whereas secondary education tends to redistribute resources from poor to rich.

• Private sector should be encouraged to enhance the secondary level education.

• Adult education programmes should be initiated.

• Quality of education should be improved by improved selection and training of teachers, better learning material.

• Curriculum should take into account the linguistic and home background of the students.