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THE IMPACT OF EDUCATION

ON ECONOMIC GROWTH

Education is defined as the stock of skills, competencies and other productivity-enhancing characteristics. It acts as a major determinant of human capital. Higher levels of education are associated with better social and political outcomes and education plays a crucial role in breaking inter-generational poverty. Educated individuals are not only able to fend for themselves and perform their duties as a responsible citizen, but also to contribute towards the economic growth of their nation.
Economic growth is a very important phenomenon in the long run. It explains the major differences in the wealth and living standards of nations. Growth could be attributed to either a rise in capital and labour or productivity in which the capital could be of various types but mainly physical and human. The classical growth theory suggests that growth, in the long run, is sustainable due to external technological progress while new growth theories suggest that investment in human capital helps sustain growth in the long run. Human capital, in economics literature, is mainly measured using the years of education acquired.
The major mechanism through which education increases growth is enhancing human capital and productivity.
Firstly, education increases the collective ability or skills of the workforce to carry out existing tasks; hence, more output could be produced in less time which raises the productive efficiency.
Secondly, education, especially that of secondary and tertiary levels, facilitates the transfer of knowledge about new products, and helps the labour in absorbing foreign technologies which are more efficient; hence, causing productivity to improve. Investing in education also boosts a country’s capacity to innovate and move on the technological frontier forward, as educational institutes are a hub for research and development. Various other spill-over effects are also associated with education, such as decreased fertility rates with increased primary education of women, or increased life expectancy in countries with educated masses.
Numerous studies validate the positive impact of education on economic growth; according to UNESCO, by spending one US dollar on education, as much as US$10 -15 can be generated in economic growth. Similarly, it reports that if 75 percent more 15-year-olds in 46 of the world’s poorest countries were to reach the lowest OECD benchmark for mathematics, economic growth could improve by 2.1 percent from its baseline and 104 million people could be lifted out of extreme poverty. It is through prior mentioned mechanism – education improves economic growth.
If we look at the economic progress of Pakistan, the GDP growth has been following a stop-go cycle. Pakistan’s GDP per capita has been, on average, rising till date, but growth spurts followed by immediate reversal have kept it from achieving its true potential. To quote an example, Pakistan was way richer than South Korea in the 1960s but now South Korea has a far higher GDP than that of Pakistan. The major source of growth for the Korean economy was its investment in human capital, along with the pursual of an outward growth policy; their skilled labour assimilated the foreign technology causing the manufacturing sector to grow by 17 percent between 1960 and 1970. The lack of investment in education, and hence a lack of skilled labour, which has been the major source of growth for the most Western economies, along with structural problems might explain the lack of sustainable growth for Pakistan.
According to World Bank figures, Pakistan’s spending on education as a percentage of GDP was 2.9 percent in the year 2017 while the world average is 4.45 percent of GDP. Similarly, if we look from the perspective of government spending on education, it was 14.54 percent in the year 2017. As per international benchmark at least 4 percent of GDP should be allocated to education sector, keeping in view the commitment made for implementation of one of the targets of SDGs.
After the 18th amendment to the Constitution of Pakistan, the subject of education has been devolved to provinces; now it is the responsibility of the provinces to come up with comprehensive strategies for improving the standard of education, and making it accessible to poor segments of the society, particularly those residing in rural areas. The allocation of funds as percentage of GDP to education has been hovering around 3 percent which is not sufficient for turning around the education sector. Further, the capacity for utilization of allocated funds is also questionable as the funds are embezzled in the absence of a comprehensive supervisory mechanism. At this juncture, time Pakistan needs to take a stock of its policies, particularly in education sector, so as to align it with the modern requirements of changing environment around the world to make our human resource competitive in the world community and to tread on the path of economic progress and well-being of the people. This is the only solution to not only achieve economic security but also attain the ultimate goal of being a welfare state.

The author is currently doing BSc double major in Economics and Finance from Lahore School of Economics. navairaramzan1999@gmail.com