THE ROLE OF HUMAN CAPITAL IN ECONOMIC GROWTH OF PAKISTAN (1971-2008)

Abstract

Positive economic growth has always been the core objective of economic policies across the world. The economists and policy makers have always been engaged in digging out the determinants of economic growth. In 1960’s, the concepts of health, consumption and education were introduced in economic growth studies, which led to addition of the term, “human capital” in determinants of economic growth. In 1980’s, human capital was formally introduced in economic growth literature and since then, it became an integral component of economic growth. The present study aims at finding-out the role of human capital in economic growth of Pakistan during the period 1971-2008. Education, health, and Research and Development (R&D) have been used as measures for human capital. An attempt has also been made in this study to find the impact of institutions on human capital and thus, its indirect contribution to economic growth. The study in hand, also strived to explore the impact of human capital on physical capital accumulation and labour force participation. Likewise, the contribution of Total Factor Productivity (TFP) has also been calculated in presence of education, health and R&D separately. The calculations of TFP have been revised by taking different shares of factors inputs and time intervals. The contribution of TFP in Pakistan has been compared with seven South Asian countries. The study has used secondary data for analysis, which has been taken from different national and international organization. Growth Accounting Method (GAM) has been used to calculate TFP. The econometric techniques used for analysis are Ordinary Least Squares (OLS), Two Stage Least Squares, Cointegration and Granger Causality test. The results of the study show that TFP contribute 38.47 % to GDP per capita, when education is used as a measure for human capital. This contribution increases to 47.74%, when education is replaced by health and fell to 18.27% with R&D as measure of human capital in TFP model. The contribution of TFP increases irrespective of measure of human capital, when minimum share of capital is used. It increases to 46.72%, 57.08% and 24.14% in case of education, health and R&D respectively. The results of economic growth model, obtained through the Ordinary Least Squares (OLS) show that education, health and R&D positively affected economic growth of Pakistan during the study period. Health and R&D remained statistically significant while education remained insignificant. The results of simultaneous equations model show that Education, health, R&D and labour are significant determinants of economic growth in Pakistan. The quality as well as quantity of educational institutions and Real GDP per capita appeared as significant determinants of education in Pakistan. The results further show that education and quality of health institutions are significant factors for health in Pakistan. Similarly, educational institutions and Real GDP per capita appeared as major and significant determinants of R&D during the study period. In the same way, R&D, health and education positively affected physical capital in Pakistan. The Cointegration test results show that education, health and R&D affected economic growth in long run in Pakistan during 1971-2008. The equations for education and health also showed the existence of cointegrating equation, which indicates the existence of longrun relationship among the variables. Real GDP per capita, education, quality and quantity of educational institutions affect R&D, while human capital, labour force and economic growth affect physical capital in the long run. Similarly, human capital in form of education, health and R&D emerged as a macro determinant of labour force participation. The Granger Causality Test shows some important uni-directional relationships among the variables of the study. The findings of the study suggest TFP to be an important determinant of economic growth in Pakistan, hence, the determinants of TFP needs to be explored. Education should be kept on top priority and resource allocation to education should be increased. It is strongly recommended to enhance investment in health and R&D to put the economy on path of sustained growth. Labour in Pakistan positively affect economic growth, therefore to increase the productivity of labour, it should be equipped with appropriate skills.