Posted by : Ahsan Khan Monday, 23 April 2012

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.”
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.


According to Schultz:
There are five methods of developing human resources:
  1. Providing health facilities which increase the life expectancy of the people
  2. Arranging on the job training
  3. Provision of education at primary, secondary and higher level
  4. Allowing migration to individuals for changes of jobs
  5. Organizing study and extension programmes for the adults


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.
  1. Literacy rate is just 57.7 % in Pakistan, i. e., almost 100 % in developed countries
  2. 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:
  1. Improvement in the treatment method of a Doctor
  2. Advanced means of teaching for a Teacher
  3. Introduction of new inventions and discoveries to engineers
  4. 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.
  1. Total expenditure on health sector is only 0.23 % of GNP in Pakistan.
  2. Death rate is 0.73 % and life expectancy is 67.2 years
  3. One MBBS doctor is available for 1222 persons
  4. One hospital bed is for 1701 persons
  5. 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.
  1. 50 % population has to go to outside the house to obtain water in Pakistan
  2. 65% population has access to clean water
  3. Only 44 % population has facilities to sewerage and sanitations
  4. Number of continuous air pollution monitoring stations is only 7
  5. Growth rate of electricity and gas sector – 21.1 %


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:


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.


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.


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.


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.
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. 

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