One of the basic objectives of economics is

One
of the basic objectives of economics is to provide welfare to people most
efficiently. Human capital can be defined as the skills, knowledge and other
intangible assets which can be used to produce some economic value. A high
number of researchers have revealed that human capital plays a big role in economic
growth. (Mincer, 1958) first theorized human capital as an important proponent of
economic growth, as it raises output. This theory was used as a basis for
future studies on economic growth. (Mankiew et al., 1992) utilize secondary
education enrollments. (Barro and Lee, 1993) and (Bosworth et al., 1995) have used
average years of schooling. Education was viewed as the core factor of human
capital by macroeconomists, while health held equal stature according to
microeconomists as labour needs to be healthy to work efficiently. (Romer,
1986, 1990; Lucas, 1988; Rebelo, 1991) emphasized that human capital formation
was a major factor which explains difference in growth performance of developed
and under-developed countries.

Classical
theory suggests that labor productivity is an exogenous variable which depends
upon workforce in terms of capital and technological advances. It fails to
capture the potential growth of productivity due to education, health or
training. Studies on theory of market value have shown that there is an
influence of intangible assets, such as R&D, intellectual properties of
companies and patents which lead ultimately to economic growth. Companies that
are deemed as the spine of the biggest economies were born where education and
health are of top quantity and quality. This has been observed throughout the
past two decades, as companies raised huge amount of assets through developing
technologies, which came through an incubating environment. Companies such as
Apple, Google, Microsoft, have created industries and made leaps in
technological advances, enjoy assets worth more than most countries. This
influx of money then leads to higher economic growth of their countries. Tesla
for a more recent example, have completely changed the automotive industry by
developing fully electric production cars. This technology for mass production
was deemed impossible for a decade into the future. The same can be said for
SpaceX.

The
incredible economic growth of countries with very few natural resources, the
likes of which relied on importing their input materials. Japan, Taiwan and
other countries of the sort relied heavily on their human capital formation and
bore the fruit, as they attained high growth rate and therefore greater
welfare. USA, Germany, Japan have had persistent high economic growth over a
100 years, and if growth of land and physical capital is taken into account
there should’ve been a rapid decrease in returns and eventually no growth. The
persistence can therefore be credited to technological advancement, which came
through formation of human capital. This scientific advancement gives high
value to education, training and other factors leading to it.

The
economic effects of population health can be seen both at the micro and macro
levels. There is consensus of health’s effect on economic growth, however the
magnitude of the effect is the area where there exists a difference of
opinions.  

Developing
countries have more human capital as compared to physical capital, so more
emphasis should be given to developing labor quality. Pakistan has a very large
labor population but had very low spending on health and education throughout
its history. In the past decade health expenditure revolved around .9% while
education averaged 2.4%. Comparing two neighboring countries Iran and India,
Pakistan ranks below both on life expectancy and average years of schooling.
Although it ranked closely on life expectancy at birth with India but trails
both countries on education and health by some margin according to the human
development index. It is currently ranked at 147 while India and Iran rank at
131 and 69 respectively.

Health
and Education indicators alone fail to capture development of capabilities and
skills of labor, so a broader measure is needed to study the effect of human
capital on economic growth. Variables such as unemployment, protection of
property rights, social security affect development of human capital. Unemployment
generates a negative effect on human capital, as there is lack of area to apply/develop
skill and knowledge acquired by the individual. Social security has the same
effect as people are demotivated to work/study in institutions due to
terrorism/crime. This study tries to capture the effect of these variables on
economic growth of Pakistan.