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

2. 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

3. 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.

4. METHODS OF CAPITAL
FORMATION
According to Schultz:
There are five methods of developing
human resources:
i. Providing health facilities which
increase the life expectancy of the
people
ii. Arranging on the job training
iii. Provision of education at primary,
secondary and higher level
iv. Allowing migration to individuals
for changes of jobs
v. 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:

5. 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.
i. Literacy rate is just 57.7 % in
Pakistan, i. e., almost 100 % in
developed countries
ii. 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

6. provide training to the on job
employees.
Provisions of training facilities,
practical applications and refresher
courses will lead to:
i. Improvement in the treatment
method of a Doctor
ii. Advanced means of teaching for a
Teacher
iii. Introduction of new inventions and
discoveries to engineers
iv. 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

7. 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 %

8. 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.
i. Total expenditure on health sector
is only 0.23 % of GNP in Pakistan.
ii. Death rate is 0.73 % and life
expectancy is 67.2 years
iii. One MBBS doctor is available for
1222 persons
iv. One hospital bed is for 1701
persons
v. Per capita food intake is targeted
at 2526 calories per day, against
the required 2550 calories per day
6- Housing Facilities

9. 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.
i. 50 % population has to go to
outside the house to obtain water
in Pakistan

10. ii. 65% population has access to
clean water
iii. Only 44 % population has facilities
to sewerage and sanitations
iv. Number of continuous air pollution
monitoring stations is only 7
v. 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:

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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.

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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.