Development of human capital, Human capital formation, its factors, importance and problems

Posted by : Ahsan Khan Monday, 23 April 2012

WHAT IS MEANT BY HUMAN CAPITAL FORMATION? WHAT ARE THE FACTORS, IMPORTANCE AND PROBLEMS OF HUMAN CAPITAL FORMATION IN PAKISTAN?

Introduction:

Various economists believe that the quality of labour inputs or human capital is very important for economic development. Too little population cannot help in the development of a country but if training, education, skills etc. are provided to population then it can speed up the growth of economic development.

What is Human Capital?

Human capital refers to the productive qualities that activate the labour force. The productive qualities are education, health and skills of the labour force.

According to Michael Parkin:

Ø “Human capital refers to the skill and knowledge of human beings.”

Ø “Human capital is the qualities of education, skills, training specialization etc. in population.”

Human Capital Formation:

Expenditure on education and training are called human capital formation. It refers to the process by which educated, skilled and trained persons are increased in a country. Accordingly, human capital formation is the act of increasing the productive qualities of labour force by providing more education and by increasing skill, health and nutrition level.

In the words of Prof. Harbinson:

“The process of acquiring and increasing the number of person who have the skills, education and experience which are critical for the economic and political development of a country.”

Explanation:

Human capital formation is the process by which educated, skilled and trained persons are increased in a country. Therefore, it is the allocation of resources to improve the value of population. If the people of a country are well educated, well nourished, skilled and healthy that will be said to have more human capital.

METHODS OF CAPITAL FORMATION

According to Schultz:

There are five methods of developing human resources:

Providing health facilities which increase the life expectancy of the people
Arranging on the job training
Provision of education at primary, secondary and higher level
Allowing migration to individuals for changes of jobs
Organizing study and extension programmes for the adults

FACTORS OF HUMAN CAPITAL FORMATION IN PAKISTAN

Following factors are important for the development of human capital:

1- Better Education

Increase in education is the major factor of human capital formation. Education is a major form of investment in human capital, which provides as a key input in human resource development. Education improves the quality of manpower and enables the skilled workers to manage the developing technology of the country.

Literacy rate is just 57.7 % in Pakistan, i. e., almost 100 % in developed countries
Expenditure on education sector is just 1.8 % of GDP i. e., lowest in Asia

2- On-the-Job Training

Low literacy rate leads to low efficiency of workforce. Heavy amount of investment is needed to provide training to the on job employees.

Provisions of training facilities, practical applications and refresher courses will lead to:

Improvement in the treatment method of a Doctor
Advanced means of teaching for a Teacher
Introduction of new inventions and discoveries to engineers
It makes possible to connect the technicians with modern technology

3- Non-material Capital Development

More attention is given to material capital formation rather than human capital formation in Pakistan. In fact, more concentration should be given to human capital formation because it improves the services of engineers, technicians and administrators, which cause in economic growth and development.

4- Manpower Planning

Rapidly growing population and improper manpower planning are resulted in unemployment and under-employment. Due to improper labour market, there is brain drain in Pakistan. Availability of proper manpower planning is also a main factor of human capital formation.

i. Population growth rate is 2.1 %

ii. Unemployment rate is 5.6 %

iii. Under-employment rate is 16 %

iv. Disguised-unemployment rate is 20 %

5- Health and Nutrition

Poor population is backward also in Pakistan. Rapidly growing population has not proper health and nutrition facilities. If a worker is not healthy and fully nourished then it is impossible for it to maintain the efficiency.

Total expenditure on health sector is only 0.23 % of GNP in Pakistan.
Death rate is 0.73 % and life expectancy is 67.2 years
One MBBS doctor is available for 1222 persons
One hospital bed is for 1701 persons
Per capita food intake is targeted at 2526 calories per day, against the required 2550 calories per day

6- Housing Facilities

Appropriate housing facilities are the basic right of the population. It is the basic necessity of life and an important factor of human capital formation. Housing facilities are not in a satisfactory situating in Pakistan. Effective planning of government is required to provide proper houses and shelters to the existing population.

7- Water and Electricity Facilities

Drinking water and electricity facilities in Pakistan are insufficient and irregular. There is problem of load-shedding, which inversely affect the productivity level. These facilities are compulsory for the human capital formation in their advanced form.

50 % population has to go to outside the house to obtain water in Pakistan
65% population has access to clean water
Only 44 % population has facilities to sewerage and sanitations
Number of continuous air pollution monitoring stations is only 7
Growth rate of electricity and gas sector – 21.1 %

IMPORTANCE OF HUMAN CAPITAL FORMATION

Human capital formation is the most essential source of economic growth. It is a source for both to increase productivity and to achieve technological advancement. Importance of human capital formation can know through following aspects:

A. HISTORICAL ASPECTS

1- Economy of Japan and Germany

Japan and Germany are the nations which built their economies on the basis of technological advancement, know how and educations.

2- Economy of United States

There is a general agreement among government advisors in US that it will be necessary to increase investments in human capital. They tell us that a dollar invested on education brings a grater increase in national income than a dollar invested on dams, roads and factories.

B. ECONOMIC ASPECTS

3- Co-existence of Capitals

Capital is one of the most important factors of production. But only the capital is not enough to utilize the resources properly. Increase in saving and investment is not responsible for the utilizations of resources. Capital without human capital has less importance in economics. Accordingly, co-existence of both capitals is necessary for economic growth and development.

4- Full Utilization of Resources

Better utilization of available resources is impossible with the help of only saving and investment. Human capital formation is also required for the optimal allocation of resources of a country.

5- Effective Planning

The effective planning is possible only if there are a large number of educated engineers, trained doctors and healthy labour force etc. in the country.

6- Maintenance of Machinery

The more import of machinery and technologies are not enough for economic development but skilled people are also required to operate and maintain the machines.

7- Improved Infrastructure

Human capital formation creates more educated person, trained doctors and efficient engineers. All these result in efficient management, better health and proper system of transport and communication.

8- Industrial Performance

Industrial sector is the second major sector of our economy. It is still backward. Only more investment and use of modern techniques of productions are not necessary for its improvement. Human capital formation is required for the development of industrial sector.

9- Extra Production

The productive capacity of the labour is very low in less developed countries like Pakistan. There is a need of human capital creation to increase the productive capacity of labour. Extra production can be achieved with the help of human capital formation.

10- Self Employment

Pakistan is facing a major economic problem of unemployment. Educated, skilled and trained labour forces can create self-employment opportunities due to human capital formation. So, human capital formation is resulted in reduction in unemployment.

11- Modern Technology

Sufficient amount of capital is required to import modern technology. But it is impossible to operate the modern techniques of production without human capital formation.

12- Increase in Efficiency of Factors

It is possible to improve the efficiency of factors like labour and capital due to human capital formation. Productivity level is low that can improve through human capital development in Pakistan.

13- Modern Means of Production

Human capital formation leads to introduce the new, better and improved methods of production. Modern means of production cause in more output by using less raw material in less time period.

14- Reduction in Poverty

There is unemployment and poverty due to illiteracy, lack of skill and shortage of training facilities. Poverty can be reduced through human capital formation. Reduction in poverty is the great symbol of economic progress.

C. SOCIAL ASPECTS

15- Increase in Literacy Rate

Human capital formation makes it possible to invest in education sector. Today return in education sector is not low. Low literacy rate of 57.7% in Pakistan can increase with the help of human capital formation.

16- Improvement in Health

Human capital formation encourages the more investment in health sector. Investment in health sector introduces modern tools and means of treatment, all this causes in improvement and maintenance of better health.

17- Better Living Standard

Human capital formation increases the income and standard of living of the people. More education, skill and training will improve the living standard of the population.

PROBLEMS OF HUMAN CAPITAL FORMATION

The main problems of human capital formation in developing countries like Pakistan are as follow:

1- Rapidly Growing Population

Growth rate of population is very fast. Increase in resources is less than increase in population. High population growth rate of 2.1 % is a big problem in way of human capital formation.

2- Lack of Awareness

People of Pakistan are not aware of with the role of the available resources. Due to lake of education, people are ignorant and have not enough knowledge to evaluate the hidden benefits.

3- Unequal Distribution of Wealth

There are various disparities in the country due to unequal distribution of income and wealth. Only rich class can participate in economic activities and in the creation of human capital. A little portion of population can afford the higher education, which is so costly. 20 % poor population has control on only 6 % national resources in Pakistan.

4- Investment in Buildings and Equipments

People in less developed countries like to invest in building, equipment, gold and silver ornament and other real states. They have little trend to invest in human resources that is also a big problem to develop the human capital.

5- Inappropriate Education

Education system in developing countries is backward. Literacy rate is 57.7% and expenditure on education is only 1.8 % of GDP in Pakistan.

6- Ill-health and Ill-nutrition Facilities

There is shortage of trained nurses, qualified doctors, medical equipments and medicines etc. in the less developed countries of the world. The less availability of health facilities create risk to the million of the people living there.

7- No Proper Training for Employees

There is no availability of training facilities for the employees in Pakistan. Training facilities are necessary for the up-dating and refreshing the knowledge. These are also some other problems of human capital formation.

8- Less Promotion for Employees

Another problem in way of human capital development is that there is high rate of unemployment and under-employment in developing countries. On the other hand, there is less reward of the hard work and efficiency.

9- Agriculture, the Main Occupation

Mostly people have outdated knowledge and almost 2/3 of the population is attached with agricultural sector. In this situation, people have no or less trend to be educated, skilled and trained.

10- No Manpower Planning

There is absence of manpower planning. Sometimes, due to non-availability of exact information about population it is not possible to plan about manpower.

Conclusion:

Investment in human capital is also required to raise the general living standards of the people in developing countries. This is possible when education and training make full and rational utilization of surplus manpower by providing larger and better job opportunities in both rural and urban areas. There is more return raise in income and improvement in living standard of the population due to capital formation.