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What Is the Role of Human Capital in Economic Development?

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.

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 that 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 that 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?

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

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.

The Five Ways of Developing Human Capital

  1. Provision of health facilities that 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

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 equipment: 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 equipment 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 of 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 underdeveloped 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 grassroots 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 postgraduates result 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.


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I enjoyed reading your piece. Very informative. however, some of the definitions in your article could have been cited

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