Pakistan Bulletin

An up-to-date and informed analyses of key issues of Pakistan.

Human Capital and Economic Growth in Pakistan

September 2023

Human development is of paramount importance for economic growth, as it fosters a population of healthy, educated, skilled, motivated and hopeful individuals who, endowed with liberty, naturally aspire to achieve development for themselves and society as well. In the context of Pakistan’s contemporary challenges, the writer argues that investing in its people could pave the way for the country’s socioeconomic development.

According to Julian Simon, a famous economist, “The ultimate resource is people — especially skilled, spirited, and hopeful young people endowed with liberty — who will exert their wills and imaginations for their own benefits, and so inevitably they will benefit the rest of us as well”. How does a nation ensure that its people will be skilled and spirited? The nation must educate its people to endow them with various skills, keep them healthy, and develop them into productive human beings. Economists call this process “human capital development” and it is an essential part of overall economic development and growth.
It is education which not only develops an individual to overcome personal challenges, but also enables nations to achieve their objectives. Various research papers, world-wide including Pakistan, show that it is not just labour, land and capital that contribute to economic growth, but human capital also contributes, distinct from labour as well as embodied in it. While labour as a factor of production and growth comes from population, human capital comes from an educated, healthy, and skilled population. Human capital also helps to improve productivity and human ingenuity helps to innovate that can increase growth manyfold. The need for a population to become highly educated can hardly be overemphasised.

It is imperative for the government to invest more in human capital thereby to promote growth and development in Pakistan. This, however, cannot be done with the least investment in social development sectors, especially in education and health.

Human capital is a multidimensional concept and difficult to measure. According to the World Bank “Human capital consists of the knowledge, skills, and health that people invest in and accumulate throughout their lives, enabling them to realise their potential as productive members of society. Investing in people through nutrition, healthcare, quality education, jobs and skills helps develop human capital, and this is key to ending extreme poverty and creating more inclusive societies.” The World Bank also constructs a Human Capital Index (HCI) that “measures the amount of human capital that a child born today can expect to attain by age 18. It conveys the productivity of the next generation of workers compared to a benchmark of complete education and full health.” This index varies from zero to one, where one represents the benchmark of complete education and full health.
The level of HCI for Pakistan in 2020 was 0.41, which means that a child born in Pakistan will be only 41 per cent as productive when she grows up as she could be if she enjoyed complete education and full health. Pakistan fares very poorly in comparison with 130 countries for which the World Bank prepared HCI. It ranks 118 among these countries and its rank is also the lowest in South Asia (with an average HCI of 0.48). The highest level of HCI was 0.88 for Singapore, and the lowest level was 0.29 for Central African Republic. Countries closer to Pakistan in terms of rank were Lesotho, Comoros, Iraq, and Malawi among others. The levels for India and Bangladesh were 0.46, and 0.49 respectively, with better rankings compared to Pakistan.
According to the World Bank, there are six key components for measuring HCI: probability of survival to age 5, expected years of schooling, harmonised test scores, learning-adjusted years of school, adult survival rate, and the fraction of children under five not stunted. Pakistan fares poorly in all these six components. Ninety-three out of 100 children born in Pakistan survive to age 5. A child who starts school at age 4 can expect to complete 9.4 years of school by her 18th birthday. Quality of education is bad in Pakistan as students score only 339 on a scale where 625 represents advanced attainment and 300 represents minimum attainment. Factoring in what children actually learn, expected years of school is only 5.1 years. Across Pakistan, 85 per cent of 15-year-olds will survive until age 60. This statistic is a proxy for the range of health risks that a child born today would experience as an adult under current conditions. Only 62 out of 100 children are not stunted. Thirty eight out of 100 children are at risk of cognitive and physical limitations that can last a lifetime.

Given the above dismal situation, it is imperative for Pakistan to invest more in human capital to promote growth and development. This, however, cannot be done with a very low level of expenditure on education and health. According to the Pakistan Economic Survey 2023, expenditure on education was only 1.7 percent of the country’s gross domestic product (GDP) and health at 1.4 percent of GDP. Not only the expenditure on education is low, it has also declined from 2.1 percent of GDP in 2018 to 1.7 percent of GDP in 2023. If the government focuses only on two areas, it can increase its human capital in a few years. First is the provision of clean drinking piped water to its citizens and the second is increasing enrolment rates in primary education. Provision of clean drinking water will reduce many diseases, lower infant and child mortality and increase adult survival rate. More investment in primary education will reduce dropout rates from primary and enable more students to complete secondary and post-secondary education.

Human capital is a multidimensional concept; according to the World Bank, it encompasses knowledge, skills, and health that people invest in and accumulate throughout their lives, enabling them to realise their potential as productive members of society.

According to the World Bank, the net primary enrolment rate in Pakistan was 68 percent in 2018 which has gone down to 64 percent in 2019 according to the Pakistan Social and Living Standards Measurement (PSLM) Survey 2020. “With over 20 million school-age children out of school, high levels of child malnutrition, and low empowerment of women, Pakistan’s human capital challenges are among the most serious in the world — it is a human capital crisis that is profound, silent and with far-reaching negative effects on the potential of the country and its people”. Pakistan’s investment rate was very low at 13.6 per cent of GDP in 2023. It has also declined over the years. Aggregate consumption was almost 98 per cent of the GDP. There is obviously an urgent need to increase investment. If the government alters its priorities toward more investment in human capital it will increase overall investment and promote growth on a sustainable basis.

Riaz Riazuddin


The author is a former Deputy Governor, State Bank of Pakistan.

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