The role of education in economic development

Education plays a major role in the economic development of any country, may it be developed or developing. Many resources play a part in the growth of a country’s economy one of which and perhaps the most important is human capital, which means the workforce of the country. A good and productive workforce by making use of other resources can lead an economy in to growth and prosperity.

One of the major factors in developing this resource i.e. human capital is education. Therefore education is one of the most important factors that lead a country to sustained economic growth. Education has therefore become a very important part of every government policy. Much effort has been done with respect to education in many developing countries including Pakistan. Many studies have been conducted in the past to examine the relationship between education and the economic development of a country. The following is a chronically review of some of the important work done in the past.

In the year 1998 Zafar Iqbal and Ghulam Mustafa Zahid from the `Pakistan development review` worked on the “Macroeconomic determinants of economic growth in Pakistan”. The study examines the effects of some of the most important micro economic variables like education, physical growth and budget deficit on Pakistan’s economic growth. The period of 1959-60 and 1996-1997 has been examined using a multiple regression framework. The quantitative evidence proves primary education and the openness of the economy to be important factors for accelerating growth. But on the other hand budget deficit is negatively related to output and growth. The study also shows that relying on domestic resources for finance is our best shot as external debt is also negatively related to growth. The study focuses on coming up with long run economic growth oriented policies in order to sustain economic growth.

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The results show that the real GDP growth and per capita income are in a positive relationship with the primary school enrollment-labor force ratio. Therefore it is concluded that primary education is a foundation stone for the development of Pakistan. It is cretin that the government should put all in efforts to provide primary education to everyone of age that needs it and then it can head off to the path of economic growth. Also proved is that physical capital is also in important part of growth may it be in any form like infrastructure. Also the tests conclude that openness of the economy “meaning openness to imports and exports of goods” has a positive relationship with growth. On the other hand the study also suggests that budget deficit is the most dangerous factor effecting the economic growth along with external debt which suggests that the government should lower deficit by lowering non development expenditures and using only domestic resources to raise finances is our best shot for experiencing economic growth.

The study of “Entrepreneurship Selection and Performance: A Meta-analysis of the Impact of Education in Less Developed Countries” conducted in 2004 by Van Der Sluis, Mirjam Van Praag and Wim Vijverber provides an analytical view of the impact of schooling on the selection on entrepreneurship and the impact on less developed countries. It also proves that a marginal year of schooling raises the enterprise income by 5.5%. These returns vary by urban/rural residence, gender and the amount of agriculture in the economy. Also more educated worker end up in wage employment and also prefer to do non-farm business rather than farming. Educated women are more inclined towards wage employment rather than self employment.

The results of additional years of education are higher for women in developed countries and the ones living in urban areas. The findings also suggest that uneducated women mostly work in low income sectors like food or textile. This means that education leads women to work in a higher income opportunity.

Also in 2004 the work of Mamoon Dawood from the `institute of social studies` is of special consideration. The study raises a very important point about the education policy of Pakistan. It studies the effects on the growth of Pakistan’s economy of increased government spending in the higher education sector of Pakistan while ignoring the primary education sector.

Our education policy like any other developing countries is to invest more and more on higher education on the expense of primary education. Higher education produces skilled labor which reaps greater rewards compared to investing in the primary education sector. These rewards are gained through international trade which is very important for any developing country. What this does is create a greater gap between the skilled and the unskilled labor leaving the economy in a very unbalanced state like the one faced by India today.

The article suggests that this policy will benefit the growth in the short run but will create a gap that would have long lasting and adverse effects on the growth of Pakistan. The study concludes that in order to solve the problem of inequality the government should have a very balanced approach towards spending in both the primary and the higher education in Pakistan.

The topic of “Human capital and economic growth in Pakistan” was studied by Mohsin S. Khan in 2005. The paper evaluates the factors that explain Pakistan’s relative growth. Pakistan’s economy has grown faster than other low or middle income country but there are some others in South Asia that have done far better, the paper emphasizes on the what Pakistan has done in order to achieve that fast growth and what it has neglected that has left it behind other more excelled countries. In addition to the other obvious factors this paper focuses on the role of differences in quality of human capital and its effects on the economic growth factor.

Here four variables have been given special importance with regard to human capital, the accumulation of physical capital, quality of institutions, health care and education. Human capital here is the dependant variable whereas these four variables become the independent variables. And thereafter economic growth becomes the dependant variable and human capital the independent variable.

These four factors deeply effect the development of human capital and the development of human capital leads to economic growth. These variables have a positive relationship with the human capital development and human capital development has a positive relationship with economic growth which means that betterment in any of these four variables leads to the betterment of the country’s economic growth. The obvious fact remains that improving institutions and raising investments are important keys in achieving economic growth but the fact that countries that invest more in human capital do better in terms of economic growth. Better education and a higher level of health produces a more productive workforce which leads to increase in productivity which pushes the country’s production function outwards leading to economic growth.

In the year 2007 Michelle Riboud, Yevgeniya Savchenko and Hong Tan conducted a study “The Knowledge Economy and Education and Training in South Asia” This study evaluates how education and training a countries human resource can have far reaching implications on developing countries in terms of job creation, sustainability of growth, competitiveness and poverty reduction. The study takes into account the skill development of the south Asian countries and how it affects the labor market outcomes. Skill development here includes both educating the people and training them. The main aim of the study is to document and compare trends of training and education in the south Asian region and observe the changes bought upon by them to earnings and employment.

The study uses household, firm level and labor force surveys from the 1090 to the recent years. The study mainly focuses on Pakistan, Sri Lanka, India and Bangladesh and compares then with countries in East Asia and other regions.

The study concludes that all the South Asian are committed to work in the sector of education but still their efforts are not adequate enough to make them stand in line with East Asia or the rest of the world. It may be said for some cases that the gap between East Asia and South Asia in terms of education may be widening up rather than closing down. It also concludes that the progress of countries in this regard has been uneven and distorted. In this part of the world there has always been an uneven progress in education in terms of gender equality but this gap has diminished a lot only in the primary sector education and much work has to be done to overcome this gap in the secondary or higher education sectors. There is a demand for highly skilled labor and the governments should give special attention to the availability of education and training.

The available data for training and education is relatively robust and amenable to analysis. There has to be a better system of data collection and useability. The governments should do a better job at monitoring skill requirements and design appropriate training and educational plans to fulfill those requirements.

Later in the same year the study of “Wage Differentials, Rate of Return to Education, and Occupational Wage Share in the Labor Market of Pakistan” was conducted by Asma Hyder of `Pakistan Institute of Development Economics`. The article uses the data from the labor force surveys of 2001-02 in determining the wage differentials in the public and private sectors of Pakistan. These labor force survey is a national survey containing data from all over Pakistan regarding demographics and employment information. The first part of the article evaluates inter-sectoral earnings of the three main sectors of the economy private, state owned enterprise and public. To observe the wage gap in human capital the rate of return from different levels of schooling is examined. The levels of schooling determine the type of job which in turn can explain the wage gaps which can be very important for policy formulation.

The article considers wage differentials to be the dependant variable and education and sectors to be the main independent variables. Other factors like occupation, regional location, gender, sector of employment and the nature of employment play a major role in wage differential. For firms human capital pertains to be knowledge, experience and skills.

The results show that the more educated individuals tend to be pulled towards the public sector, also public sector workers have both higher average pay and educational level then there private counterparts. The results also show that the both public and private sector have same trend for educational categories. Education is the one of the most powerful variables that affect the wage differential and by decreasing the educational gap of the people of Pakistan the wage differential and the poverty gap can be significantly reduced.

In the year 2008 Arshad Hasan and Safdar Butt worked on “Role of Trade, External Debt, Labor Force and Education in Economic Growth Empirical Evidence from Pakistan by using ARDL Approach”. This paper studies the factors of economic growth for Pakistan over a period of 1975-2005, using Autoregressive Regressive Distributed Lag (ARDL) approach to Co-integration. The relationship of economic growth with external debt, trade, labor force and education has been discussed along with their short term and long term effects. Some of the determinants that affect the economic growth of Pakistan include education, total trade, external debt and human capital.

Many studies have been done before about economic growth and these factors, there are many theoretical models of growth which include; Lucas (1988), Becker, Murphy, Nelson and Phelps (1966) and Rebelo (1992), Tamura (1990) and Sala-i-Martin and Mulligan (1992).

The article pays much attention to the development of human capital in order to gain economic growth. And the most important part of human capital development is education. Therefore education plays a major role in the economic growth of a country and are directly related to each other. Studies in the past assume that education increases the human’s capital stock that improves their productivity and eventually contributes to growth. Bils and Klenow (2000) however take the matter differently and find that different levels of schooling are positively correlated with different growth rates.

However the results of the study indicate that there is a very positive relationship between the labor force, trade and the economic growth of a country. The external debt has proven be of relationship with the economic growth. This also indicated that economic growth has not been used properly in our country and that this might also be one of the reasons of the slow economic growth in the country. The combination of a suitable debt flow, trade and a highly productive labor force can lead to development and speed up the growth process.

Later in 2010 a study on “impact of higher education on economic growth of Pakistan” was carried out by Babar Aziz, Tasneem Khan and Shumaila Aziz. The study calculates the impact of higher education on the economic growth of Pakistan from the year 1972 till 2008 and uses the Cobb-Douglas production function to determine it. The study tries to find and establish linkages between the higher education and economic growth. The enrollment of students in higher education has been analyzed in order to determine whether their enrollment affects the quality of the labor force which in turn effects the economic growth. This study takes into consideration the findings of the “International Labor Office” (ILO, 2000) which determines that education is one of the most important indicators in the labor market.

The effect of higher education in terms change in the GDP is also considered as it is a very important determinant of economic growth. So to see the returns of higher education on the economic growth of Pakistan, GDP is taken as the dependant variable. The study also tests higher education and enrollment and GDP as both dependant and independent variables.

The study concludes that higher education has a positive impact on the growth of the economy of Pakistan. The enrollment of students in higher education means more skilled labor which in turn leads to a positive impact on GDP. But in order to get students to enroll in higher education the education expenditure has to increase which lets us to conclude that these three factors, education expenditure, enrollment in higher education and the availability of a skilled labor force and GDP are all positively related and are a very important determinant of the growth of Pakistan’s economy.

All the studies prove that education and economic growth have a strong positive relation and in order to gain economic strength every state should spend time and money in the educational sector. Though there have been many studies in this regard, the fact remains that data availability is not up to the standards in Pakistan and it creates lots of difficulties to perform an analysis and come to a conclusion. Much work has to be done in this regard to be able to make more accurate and precise evaluations. But even with the data available we can be sure that much work has to be done in the educational sector of Pakistan in order to attain a sustained economic growth and to observe prosperity.