The role of human capital in the economic growth of Pakistan.

Abstract

This study analyzes the relation between investment in human capital and rate of growth of per capita income in Pakistan. The study is conducted using data growth 1965 to 1992 for Pakistan within the neoclassical growth accounting framework. Recognizing the shortcoming of the previous studies in adjusting for changes in the quality of the labor force, this study incorporates the role of investment in education and health (human capital) in Pakistan's economic growth. Moreover, attention is focused on analyzing the effects of openness to international trade on the economy.

The study utilizes different proxies for investment in human capital in addition to the traditional sources of growth such as capital, labor, and exports. School enrollment ratios, skill differentials, and occupational mixes are used to characterize investment in education, and life expectancy at birth and physician per 1,000 population represent investment in health.

The empirical results suggest that an increase in the rate of growth of capital stock and openness to trade have a positive and statistically significant impact on Pakistan's economic growth. The coefficient of raw labor is negative and insignificant, indicating that raw labor (low skill) may not significantly contribute to economic growth. The effect of improvement in education on economic growth is generally positive and significant in all the models estimated. Primary and secondary education variables are both positive. The coefficient for primary education is, however, statistically insignificant suggesting that investment in primary education is characterized by a substantially long gestation period. The results of skill differentials and occupational groupings reinforce the findings of a positive relationship between investment in education and the economic growth of Pakistan.

The findings for improvements in health, however, are inconclusive suggesting a nebulous short-run impact on Pakistan's per capita growth rate. This may have been due to the collinear nature of other regressors in the model such as labor and capital both of which have positive effects on economic growth. The study reemphasizes the importance of investment in human capital and stresses the need to formulate appropriate education and health policies by the Pakistani government.