Poor Countries Are Less Developed Because They Have Fewer Levels of Human Capital - Essay Example

Poor Countries Are Less Developed Because They Have Less Levels of Human Capital Many studies have been performed by economists to disclosethe relationship of education, training, and health – human capital – with the development of a country. This paper will attempt to disclose the relationship between human capital and the development of poor countries. Many studies have been conducted to reveal the fact regarding the relationship among the development status and human capital, but there is still no straight answer to this question In order to disclose the relationship between the human capital and development in poor countries, three components of human capital have been taken into account. These are: education, training and health. Detailed analysis have proven the importance of human capital in the development of poor countries and cannot be ignored. It is a fact that skilled and educated workers are an asset and contribute to the wealth of their nation. Human capital plays a massive role in shaping a nation’s wealth, although the quality of the human capital varies based on the development level of the country. People are less productive and contribute less in the wealth of the nation in poor countries. This is because they do not have access to higher education as compared to richer countries. Therefore, poor countries have less human capital. INTRODUCTION: Theodore Schultz, an economist, introduced the term ‘Human Capital’ in the 1960s to describe the value of human capabilities. From an economic view-point, capital refers to the factors that contribute in the production of services and goods, and humans are key aspects that take part in all activities from production to consumption. Human capital (Health, Education, and training) is an important element that enhances the value of produced good through the contribution of competence. It is known as the economic value’s measure. The abilities, talents, attributes, skills and learning have become the key factors for the enhancement of living standards and economic development (Brian, 2007). Human capital is an accumulation of knowledge, creativity, social attributes, personality attributes, and cognitive abilities through which economic value can be produced. It is a collective view of human activities. Mostly, literacy, real GDP per capita, and life expectancy rates are used to demonstrate the human capital (Van Leeuwen, 2007). According to many economists, human capital and a country’s development are significantly associated with each other and human capital does have an impact on the development of countries. There is another prospect that is proposed by policy makers: human capital is a key supplier of economic development. Several studies have been performed to encounter the relationship of human capital with a country’s development, and these studies have been incapable of describing the strong contribution of training and education to the country’s development (Pissarides, 2000). In order to see the impact of human capital on the development of the country, two major indicators of human capital (Health and education) are used. Studies have revealed the impact of human capital on the economic development, and its significance cannot be dismissed. It is not enough to say that investing in health and education is enough for growth (Appleton and Teal, 1998). This paper is an effort to contribute to already-existing studies in this domain. LITERATURE REVIEWS: Empirical analysis: Hanushek (2013) examined the association of human capital and economic growth in developing countries. According to his research, human capital is a driving force of economic growth. He argued that the cognitive skills are the key drivers for economic growth. Hanushek has highlighted the importance of the quality of education and disclosed the fact that poor countries are not able to improve or maintain a durable economic performance without having quality education. His conclusion explored the positive association between economic growth and cognitive skills. He suggested that while developing educational policy, developing countries should pay attention towards advanced and basic skills. Izushi and Huggins (2004) have also discussed the impact of human capital on economic growth, as well as selected knowledge management and creation for the measurement of human capital. They elaborated on the importance of human capital in economic development and described human capital as the principle method for the creation of knowledge and its management. Results showed that education has a significant connection with emerging industries, but not with traditional manufacturing industries. Nevertheless, it has been encountered that accumulation of human capital does have an impact on the rate of economic growth, but its does not contribute in economic development. It is suggested that training and education should be of good quality in order to enhance the development of a country. Bils and Klenow (2000) observed the weak correlation between the enrolments of primary schooling and GDP per capita growth rate. That means primary education does not contribute much in a country’s growth, but if the impact of schooling is considered for technological growth - which is extremely necessary for any country’s growth – it is significantly positive. David et al (2012) expressed the importance of human capital in the development of accounting. In his study, human capital is determined through the working experience of employees. Results revealed that richer countries have built up more human capital as compared to poor countries, and the development of capital was the result of experienced workers. Findings also revealed an identical effect of dependent variable (human capital) on independent variable (accounting development). It has been encountered that workers’ experience build up human capital. DISCUSSION: As has been presented above, empirical studies have shown that human capital has an impact on the development of a country. However, human capital is only one variable. There are many other variables that have an impact on the development of any country. In table 2, presented in the appendix, the data of an average year of schooling from 1950 to 2010 has been taken in order to describe the fact that developing countries have a lower level of education as compared to advanced countries. Chart-3. Average Schooling Rate Comparison of Developing and Developed Countries From the above chart, it can be clearly observed that schooling in developed countries is very much higher than in poor countries. However, poor countries’ education is increasing with time. Based on this fact, it can be concluded that human capital contributes in the development of countries because schooling is a component of human capital. And the reason for lower development in poor countries is the lower development of human capital. According to Provost, developing countries are facing challenges regarding higher education. Bokona, director general of UNESCO, said: “There is no escape from poverty without a vast expansion of secondary education”. Secondary education is one factor that contributes to the economic development. In 1970, 196 million students were enrolled in secondary education and, in 2009, the number of secondary students came up to 531 million globally, and this increase is continuous. Human Capital Contributes In The Development Of The Country: Educated and skilled people are an assets to the country. Known as human capital, it causes an enhancement of the productivity of the organisation where they work. Each organisation contributes to the economic development of the country through taxes payments, capitalisation, and enhanced profit. Profitable organisations help to reduce the level of unemployment, increase the standard of living and the economic growth and all this happen because of efficient, trained and educated people. Therefore, it can be said that human capital contributes in the development of the country. Human capital (education and health) plays little but an important role in regional development (Florida, Mellander And Stolarick, 2007). After having examined the results of the studies mentioned in this paper, it can be easily elaborated that health and education are not the only factors that contributes in the development of the country. Training is another component of human capital that contributes to the growth of the economy of poor countries, and technology is considered an unforgettable tool to enhance the firm’s productivity and also push the wheel of the country’s overall development, while skilled and educated workers adopt the new technology easily and they use these technologies efficiently, which, at the end, increases the speedof the growth of the country (Izushi and Huggins, 2004). The response of each worker is highly reactive in order to create the difference in total factor productivity. There is a massive role of human capital in shaping the nation’s wealth, and with the development level of the country the quality of human capital varies. It is evident that the output level of the countries differs due to the quality differences in human capital; poor countries’ people are less productive and contributes less in the wealth of the nation because they choose less schooling as compared to richer countries.Therefore, poor countries have less human capital (Manuelli and Seshadri, 2005). The observation of the Human Development Index, see chart 2 - that is used to measure the level of economic and social development, and evaluate the level of development in different countries – shows that poor countries are not spending enough on human development and, therefore, they are less developed than richer countries. In order to have an understanding of the impact of the human capital on the GDP, the ranking of the human capital index was compared with GDP of the top and the bottom ten countries. GDP is not impacted by the position of the country on Human Capital Index- see table 3. For example, Germany has highest GDP but ranks on the 19th level on education. Switzerland has highest ranking on health and wellness as well as workforce and ranks 4th on education but ranks on the 5th position on GDP. Importantly, Canada has a comparative higher GDP and its ranking on education is 2nd. Hence, in reference to the top ten countries the impact of education is more evident. Bottom 10 countries do not reveal the any trend; see table 4- such as Yemen has comparatively high GDP in comparison of the remaining bottom 10 countries while its ranking on three factors of assessment is also ranked on lowest as shown in appendix. CONCLUSION AND RECOMMENDATION: Conclusion: Economists cannot disagree with the importance of humans and their abilities, competencies and knowledge in the enhancement of a country’s development. According to Theodore Schultz, an American economist,‘Economists have long recognized that people are an essential element of the wealth of the nation’. An individual spend his money to get higher education inorder to secure his own future, which consequently contributes to the development of the nation. For a modern economy, educated people is its most valuable resource and without this resource economies cannot grow. There are several contributing factors, such as technological advancement, demography, openness in trade, as well as human capital. Education enhances the level of human capital and people get high returns in the shape of salary. Simultaneously, the increased standard of living encourages the students to get a good education (Brian, 2007). Recommendations: It has been proven that training, learning, education and health are important factors to the development of the country and have significant contributions to increase the standard of an individual’s living and the growth of the economy. Therefore, poor countries should spend their earnings on buildingup human capital (education, training and health of the nation). Some suggestions are presented below: The government should enhance the learning - through education and training - at all levels. For this purpose, information related to the competencies of workers in the market should be collected from diverse resources. Competencies that meet the emerging trends should be promoted. The government should prepare the framework for the certification of qualification of trainers. Some standards ought to be set for training providers and should help them to meet those established standards so they can better groom their students. The government should assure that students and employees are being trained properly and accordingly. Students should be provided career guidance during their studies. Use of advanced technology and traditional practices that are fruitful for the enhancement of productivity should be obligatory in the organisations. References: Appleton, S. and Teal, F. (1998). Human Capital and Economic Development. Available from http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/00157612-EN-ERP-39.PDF [Accessed 7 March, 2014] Bils, M. and Klenow, J. (2000). Does Schooling Cause Growth?.The American Economic Review, Vol. 90, no. 50, pp. 1160-1183. Brian, K. (2007). OECD Insights Human Capital How what you know shapes your life: How what you know shapes your life. OECD Publishing. Florida, R., Mellander, C. and Stolarick, K. (2007). Inside the Black Box of Regional Development: Human Capital, the Creative Class and Tolerance. Creative Class, Available at: http://www.creativeclass.com/rfcgdb/articles/Inside%20the%20black%20box.pdf [Accessed 7 March, 2014] Hanushek, E. (2013). Economic Growth in Developing Countries: The Role of Human Capital. http://hanushek.stanford.edu/sites/default/files/publications/Education%20and%20Economic%20Growth.pdf [Accessed 7 March, 2014] Izushi, H. and Huggins, R. (2004). Empirical analysis of human capital development and economic growth in European regions: Impact of education and training. Office for Official Publications of the European Communities, pp. 72-116. Manuelli, R., &Seshadri, A. (2005). Human capital and the wealth of nations. March. Pissarides, C. A. (2000). Human capital and growth: a synthesis report (No. 168). OECD. Provost, C. (2011). Developing countries face growing secondary education challenge. The Guardian, Available from http://www.theguardian.com/global-development/poverty-matters/2011/oct/25/developing-countries-secondary-education-challenge [Accessed 7 March, 2014] Van Leeuwen, B. (2007). Human capital and economic growth in India, Indonesia, and Japan: a quantitative analysis, 1890-2000. Box Press shop. Appendix Table 2: Aducational Attainment In Developed And Developing Countries Source: New Data Set of Educational Attainment in the World 1950-2010 Table 3, GDP PER CAPITA WITH THE HUMAN CAPITAL- INDEX TOP TEN COUNTRIES Table 4, GDP PER CAPITA WITH THE HUMAN CAPITAL INDEX- BOTTOM TEN COUNTRIES Chart 1, GDP PER CAPITA RATE OF POOR AND DEVELOPED COUNTRIES Source: Countryeconomy.Com Chart 2, HDI OF POOR AND DEVELOPED COUNTRIES Source: Countryeconomy.Com Read More