What Is the Role of Human Capital in Economic Development?

Updated on August 14, 2018
saif113sb profile image

Saif has written about inflation, deflation, laws of supply and demand, and other important economics-related topics for over eight years.

Learn how human capital affects economic development worldwide.
Learn how human capital affects economic development worldwide. | Source

Modern economists are of the view that natural resources (i.e. forest minerals, climate, accessibility to water, energy sources, etc.) play an important role in the economic development of a country. A country which has abundant natural resources is in a position to develop more rapidly than a country that is deficient in such resources. However, the presence of abundant resources is not a sufficient enough condition to explain all aspects of economic growth. Economies are created and managed by people. These people must be capable of performing the duties required to create such an economy. Matters of economic growth and decline hinge on the population. This is called human capital, and to truly understand the world, we must understand the role that populations play in an economy's growth or decline.

What You Need to Know About Human Capital

  • What is the role of human capital in economic development?
  • What are physical factors/passive factors of an economy?
  • How is human capital formed?
  • What are the problems with human capital formation in the least developed countries?

Finding the answers to these questions will give you a broader understanding of the world at large. How are countries' economies connected? Why are some countries growing faster than others? To answer these questions, we must broaden our understanding of human capital.

What Is the Role of Human Capital in Economic Development?

Human capital is the fundamental source of economic growth. It is a source of both increased productivity and technological advancement. In fact, the major difference between the developed and developing countries is the rate of progress in human capital. The underdeveloped countries need human capital to staff new and expanding government services to introduce new systems of land use and new methods of agriculture, to develop new means of communication to carry forward industrialization and to build the education system. Prof. Galbraith is right in saying that ''we now get a larger part of economic growth from investment in men and improvements brought about by improved men.''

Definition of human capital: Human capital is described as the skills, training, and health acquired through on the job training and education. Michael Pakistan Park defines it as, ''The skill and knowledge of human beings.'' It is also defined as the "endowment of abilities to produce that exists in each human being."

How Can a Country Increase Human Capital?

  • It can be increased through formal education
  • On-the-job training
  • Improved health and psychological well being.

To be more precise, if the people of a country are well educated, well nourished, skilled, and healthy, they are said to have more human capital.

As underdeveloped countries around the world make investments in human persons, they aim to increase their programming skills, social abilities, ideals, and health. These investments aim to increase productivity. The success of their economies depends upon increasing human capabilities. However, human capital does not exist in a vacuum. To better understand this complex topic, we must consider the physical/ passive factors that connect to a country's ability to make these investments.

What Are Physical/Passive Factors of an Economy?

Physical factors are considered "passive factors" of economic growth. They are not separate from each other, but hinge upon each other. These human resources are considered "active factors" of economic development.

While the active factors of a country include such important measurements as the size of a population's rate of growth in both urban and rural areas, passive factors include the availability of land in each of those areas. While the quality of a population, as measured by health standards, educational levels, and technology, is vitally important in influencing a nation's cultural and economic progress, the capital and land requirements for attempting these lofty improvements are inseparable from the equation.

A country which has developed the skills and knowledge of its people can exploit natural resources, build social economic and political organizations, and carry forward national development. That said, a country which does not pay attention to the passive factors that influence these goals will struggle to see the rapid growth in human capital that they desire.

How Is Human Capital Formed?

Definition of human capital formation: Human capital formation is the act of increasing the productive qualities of the labor force by providing more education and increasing the skills, health, and notarization level of the working population.

According to T.W. Schultz, there are five ways of developing human capital:

  1. Provision of health facilities which affect the life expectancy, strength, vigor, and vitality of the people
  2. Provision of on the job training, which enhances the skill of the labor force
  3. Arranging education at the primary, secondary, and higher levels
  4. Study and extension programs for adults
  5. Provision of adequate migration facilities for families to adjust to changing job opportunities

What Are the Problems of Human Capital Formation in LDCs?

While there are many benefits to investing in the formation of human capital in LDCs (less developed countries), it is not an easy process. Large populations deal with large issues.

Problems of human capital formation in LDCs include:

1. Faster increase in population: The population of almost all developing countries in the world (including Pakistan) is increasing faster than the rate of accumulation of human capital. As a result, these countries are not making satisfactory use of sector expenditure on education (which has accounted for 2.5% of LDC GDP over the last five years).

2. Defective patterns of investment in education: In the developing countries of the world, the governments are giving priority to primary education for increasing their literacy rates. Secondary education, which provides critical skills needed for economic development, remains neglected. Another problem related to investment in education is that in the public and private sectors there is a mushroom growth of universities. These universities are a major cost to these countries. There are also mass failures at primary, secondary, and higher levels of education that result in the wasting of scarce resources that the country needs for other kinds of development.

3. More stress on the provision of buildings and equipments: Another major problem countries run into when investing in human capital in developing countries is that politicians and administrators lay more stress on the construction of buildings and the provision of equipments than on the provision of qualified staff. It has been observed that foreign qualified teachers and doctors are appointed in rural areas, where there is little use for them. This misallocation of educational resources can negatively affect economic growth.

4. Shortage of health and nutrition facilities: In less developed countries there is a shortage of trained nurses, qualified doctors, medical equipment, medicines, etc. Having less availability to health facilities poses a threat to millions of the people. The people are faced with unsatisfactory sanitary conditions, polluted water, high fertility and death rates, urban slums, illiteracy, etc. All of these deficiencies affect the health of the people and reduce their life expectancy. This reduces the growth of human capital.

5. No facilities for on the job training: On the job training (in service training) is essential for improving or acquiring new skills. The result is that the efficiency of the workers and the knowledge held by the workers causes a growth in human capital. The competence of the workers is of the utmost importance for the efficient use of human resources.

6. Study programs for adults: Study programs for adults can also be introduced in order to improve a country's literacy rate. Study programs for adults have been introduced in many under developed countries around the world (including Pakistan). They provide basic education, which increases the skills of farmers and small industrialists. Unfortunately, this scheme failed miserably, as the adults showed no interest in getting such training.

7. Halfhearted measures for promotion of employment: Throughout most of the world, the ratio of unemployed or underemployed persons is very large. To increase employment and reduce under employment, proper investment in human capital is required. This is visibly lacking in LDCs.

A positive example is that the government of Pakistan has taken a number of steps to increase employment opportunities in the country, such as the establishment of the SME Bank for the promotion of self-employment at the grass roots level. This encourages domestic and foreign investment, which increases employment opportunities. It also increases the number of technical and vocational training centers.

8. Failure to plan for the best use of manpower: Due to the nonavailability of reliable data, there is little manpower planning in less developed countries. As a result, the demand for certain skills and the supply of those skills do not match. The result is that large numbers of skilled and highly qualified workers remain underemployed. The frustration and discontent among the unemployed and underemployed graduate and post graduates results in "brain drain." This is when skilled workers leave the country for better opportunities abroad. It is a huge loss in human resources for these developing countries.

9. Neglect of agriculture education: In LDCs where agriculture is the main sector of the economy, very little attention is paid to educating the farmers on how to use modern agricultural practices. Unless the farmers are provided agricultural education and training, they will not be able to raise the agricultural output and balance supply and demand.

Questions & Answers


      0 of 8192 characters used
      Post Comment
      • profile image


        5 days ago

        very clear and informative thak you a lot helped much

      • profile image


        9 days ago


      • profile image


        2 weeks ago


      • profile image


        2 months ago

        This article is fantastic. This will be very helpful to complete my project

      • profile image


        3 months ago

        Nice artticle .Please i need info about the role of private sector in human vapital development

      • profile image

        Tadesse Denewez 

        3 months ago


        Hope you are well

        It is very attractive article. I took lesson from this at a right time for my essay work.


      • profile image


        5 months ago

        Hlpful for mkng an Assgnmnt

      • profile image


        14 months ago

        Very helpful thanks

      • profile image


        17 months ago

        Thank u so much very usefull

      • profile image

        jemima aimee 

        3 years ago

        Very useful. Thank you.

      • profile image

        danish rahmat 

        3 years ago

        how easy it is and i understood it very easily. welldone nice and good job

      • profile image

        arti singh 

        3 years ago

        yes its right.....n thanxz .......its help me in my project work..

      • profile image


        3 years ago

        This is very informative and helps me and my team to make a beautiful project thanks alot.********

      • profile image


        3 years ago

        it is very useful

        thank you!!!!!!!!!!!!!!!!!!!!

      • profile image


        3 years ago

        This is a very good article . It explains all the points clearly.

        thanks.............. a lot

      • profile image

        eby sheesh 

        3 years ago

        awesome,useful& no other words to comment

      • profile image


        4 years ago

        best given info which i have never seen.

      • profile image

        asmita thakkar 

        5 years ago

        an article full of information

      • profile image

        m asif 

        5 years ago

        this aricle is very informative

      • profile image

        bolarinwa abigail 

        6 years ago

        thanks a lot,nice imformation

      • profile image

        Velly d Done! 

        6 years ago

        it's very educative gud work, i jst did my assignment on the topic.

      • profile image

        Akinwale Oluwasegun Hafeez 

        6 years ago

        Nice paper work, u jst induced my interest in Human Resource Economics

      • profile image

        obaji lucky 

        6 years ago

        Nice information,as the saying goes "information is power"

      • profile image

        John Ijeoma 

        6 years ago

        This has really been usefull to me.

      • profile image


        7 years ago

        Thanks for this goldmine of information. It helps me a lot.

      • profile image

        Bilha paige 

        7 years ago

        Great information and very informative and an eye opener. It has helped me get an idea on my next project.

      • Jakir13 profile image


        7 years ago from Bangladesh

        Nice article and also great information. I am searching these kinds of article which I got here.Best of luck. I have also a hub Please visit my hub and give your important suggestion or commend.............. https://hubpages.com/education/Role-of-Tax-in-the-...

      • bohemiotx profile image

        Joffre Meyer 

        7 years ago from Tyler, TX

        Really good article. I plan on returning to this article for re-reading and e-mailing it to friends and acquaintances.


      This website uses cookies

      As a user in the EEA, your approval is needed on a few things. To provide a better website experience, owlcation.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

      For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://owlcation.com/privacy-policy#gdpr

      Show Details
      HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
      LoginThis is necessary to sign in to the HubPages Service.
      Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
      AkismetThis is used to detect comment spam. (Privacy Policy)
      HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
      HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
      Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
      CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
      Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
      Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
      Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
      Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
      Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
      Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
      VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
      PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
      Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
      MavenThis supports the Maven widget and search functionality. (Privacy Policy)
      Google AdSenseThis is an ad network. (Privacy Policy)
      Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
      Index ExchangeThis is an ad network. (Privacy Policy)
      SovrnThis is an ad network. (Privacy Policy)
      Facebook AdsThis is an ad network. (Privacy Policy)
      Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
      AppNexusThis is an ad network. (Privacy Policy)
      OpenxThis is an ad network. (Privacy Policy)
      Rubicon ProjectThis is an ad network. (Privacy Policy)
      TripleLiftThis is an ad network. (Privacy Policy)
      Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
      Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
      Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
      Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
      ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
      Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)