Human Capital VS Human Development

Human Capital VS Human Development by Sumiya Amjad

Human Capital VS Human Development | Daily Writeup | Opinions

The following article, “Human Capital VS Human Development”, is written by Sumiya Amjad, a student of Sir Syed Kazim Ali. Moreover, the article is written on the same pattern, taught by Sir to his students, scoring the highest marks in compulsory subjects for years. Sir Kazim has uploaded his students’ solved past paper questions so other thousands of aspirants can understand how to crack a topic or question, how to write relevantly, what coherence is, and how to include and connect ideas, opinions, and suggestions to score the maximum.

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Outline

1-Introduction

2-Understanding Human Capital 

  • Human Capital and its production
  • Evaluating the presence of Human Capital in a country
  • Assessing the role of Human Capital in Economic Growth of a country

3-Understanding Human Development

  • Human Development and its Components
  • Measuring Human Development 
  • Importance of Human Development for a Country

4-Differences between Human Capital and Human Development

  • Scope
  • Theme
  • Impact on one another
  • Role of health and education
  • Nature of concept
  • Measurement metrics

5-Relationship between Human Capital and Human Development

6-Human Capital Development in Pakistan

6.1-Current Situation of Human Capital Development in Pakistan

6.2-Challenges Facing Human Capital Development in Pakistan

6.3-Recommendations for building Human Capital in Pakistan

  • Long-term capital development planning 
  • Family planning to reduce the burgeoning population
  • Investment in reducing infant mortality rate, child malnutrition, and out-of-school children
  • Proper utilization of the share of GDP in education and health
  • Investment in the skill development of the youth

7-Critical Analysis

8-Conclusion

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Answer to the Question

Abstract

This article probes into the intricate relationship between human capital and human development, explaining the dynamics shaping the trajectory of individuals and societies. Human capital, traditionally measured by skills, education, and productivity, is presented along with the broader canvas of human development, encompassing a spectrum of capabilities, well-being and social inclusion. First, the contrast is made between the two constructs, followed by their complex relationship. After that, using the case study of Pakistan, challenges facing human capital development are discussed, along with the recommendations for its efficient development. Thus, the study analyses the interdependent and sometimes paradoxical relationship between human capital and development.

1-Introduction

The essence of a thriving society can be understood by navigating the intellectual landscapes of the terms’ Human Capital’ and ‘Human Development’. Like celestial bodies orbiting the same cosmic arena, these concepts share a familiar gravitational pull, yet their trajectories carve varying socio-economic discourses. On the one hand, human capital transforms individuals from mere labourers into invaluable assets -repositories of knowledge, skill, and creativity. On the other hand, human development explores countless dimensions of human well-being, surpassing mere economic metrics and exploring all aspects of education, health, and social inclusion. Despite the differences, human capital and human development are interlinked concepts complementing each other to lead towards a socially inclusive and economically viable society. As far as developing countries like Pakistan are concerned, efforts to ensure human capital development can be a crucial aspect leading towards an economically strengthened country; however, various challenging factors restrain the growth. When overcome, such challenges would prove beneficial not only for the people of Pakistan but also for the wider society.

“The ultimate resource is people — especially skilled, spirited, and hopeful young people endowed with liberty — who will exert their wills and imaginations for their own benefits, and so inevitably, they will benefit the rest of us as well.”

Julian Simon- an economist

2-Understanding Human Capital 

Human Capital and its production

To start with, human capital is the collection of skills, characteristics, or knowledge a person has which adds to his productivity and output. It results from various factors, including quality of education, years of schooling, training, health, resilience, and work attitude. Human capital increases a person’s mental and physical abilities, enhancing his ability to adapt to challenging situations. Regarding the sources of human capital, they result from the amalgamation of an individual’s innate and acquired abilities. Natural ability is basically the intelligence quotient (IQ) transferred genetically, and the acquired abilities are produced through investment in education, training and health by the government or any concerned authority. 

Evaluating the presence of Human Capital in a country

Further, how much human capital is present in a country? Is there any way to measure a country’s human capital? When answered, these questions can lead an individual to evaluate the importance of human capital. So, some direct methods can be used to estimate a state’s human capital. 

First, there is a cost-based approach based on the input. Accordingly, the human capital stock is the estimation of the sum total of all the investments coming from an individual, his family, employer, or the government. Second, the lifetime income-based approach helps measure human capital by adding all the future income amounts an individual would earn. This approach is based on output rather than the input. Third, there is an indicators-based approach, which calculates human capital based on indicators of educational output. For example, by estimating the adult literacy rate, enrolment rates of schools, colleges and universities, and average years an individual spends in a school. 

Thus, the World Bank Group uses the second approach to calculate human capital. Its 2018 report titled ‘The Changing Wealth of Nations’ shows that human capital accounts for the largest share of wealth globally. The Human Capital Index considers the impacts of health and education on the future generation to be the determining factor of a country’s human capital. 

Assessing the role of Human Capital in Economic Growth of a country

Talking about the term, human capital – the educated, healthy and skilled workforce – plays a crucial part in determining the economic growth of a country. In his masterpiece “The Wealth of Nations”, Adam Smith introduced the concept of human capital without mentioning the term. According to him, a nation’s wealth and economic prosperity are determined by its individuals’ acquired and significant abilities. This shows the importance of human capital for a country’s economic progress. For instance, human capital can ensure the efficiency of the agriculture, industrial, and services sectors. This would result in better income distribution, a high employment rate, and decreased regional inequalities in a country. Thus, a country’s income can be enhanced by developing its human capital.

“Human capital is the ultimate driving force of economic growth; invest in people, and you invest in prosperity.”

Robert Solow – American Economist

Furthermore, human capital also has a non-monetary dimension apart from the monetary dimensions. Human capital, once built, can improve a society’s productivity level, positively impacting its political, social, and civil institutions. Additionally, it can enhance an individual’s quality of life as well. For example, a well-educated and well-informed person knows his rights and duties as a citizen of a state. This could ensure law and order in a society, respect for life, liberty and property of other citizens, and last but not least, the strengthening of the democratic roots of a country through social and cultural tolerance. Therefore, building human capital will help an individual be independent and skillful and help a country enjoy economic and social prosperity. 

3-Understanding Human Development

Starting with its understanding, human development is a process that strengthens human capabilities, leading people to live longer, healthier lives with decent standards of living. It entails enhancing people’s capabilities, increasing their choices and freedom, and promoting their rights as a citizen. It is a concept of development which goes beyond economic growth, as income is not the only sum total of an individual’s life. Apart from income, health, education, freedom, and physical environment are also important. 

Further, Mahbub ul Haq, a Pakistani economist, describes four components of Human Development: equality, sustainability, productivity, and empowerment. These components, when fulfilled, show the presence of human development in society. From the equality of opportunities for all citizens to their empowerment regardless of their gender, caste or class, human development would make a society socially inclusive, politically stable, and economically viable. 

“The real wealth of the nation is its people. And the purpose of development is to create an enabling environment for people to enjoy long, healthy, and creative lives.

Mahbub ul Haq

Measuring Human Development 

Next, the United Nations Development Program (UNDP) has devised a system to measure the Human Development Index based on assessing life expectancy, education- including literacy and enrolment rates, and income index or gross national income per capita. This index has three components: health, education, and standard of living. All these dimensions help to find the human development of a particular country, helping to assess the government policies and its priorities and reflect on the prevailing inequalities, poverty, and gender-related issues, among other things. 

“Overcoming poverty is not a task of charity; it is an act of justice. Like Slavery and Apartheid, poverty is not natural. It is man-made, and it can be overcome and eradicated by the actions of human beings.”

Nelson Mandela

Importance of Human Development for a Country

Focusing on its significance, a country that focuses on human development can positively impact its economy, society, politics, and governance. For example, educated individuals make an efficient labour force, an asset for advancement in any field, such as agriculture or the industrial sector. According to the study by Birdsall of data from Malaysia, Peru and Ghana, an extra year of a farmer’s schooling increases annual output from 2 to 5%. Similarly, educated people can help in technological advancements and innovations. Furthermore, investment in health can also positively impact a nation’s economic growth and productivity. A healthy population can work efficiently, giving better output than an unhealthy one. Less resources are spent, then, by the government on maintaining health departments and institutions. Additionally, there would be a high employment rate, reducing the income gap regardless of the citizens’ gender. Thus, focus on human development ensures many positive effects not only on the well-being of the people but also on the country.

4-Differences between Human Capital and Human Development

Next, human capital differs from human development in several ways.

  • ✓Scope: Human capital is a narrow concept encompassing the sum total of an individual’s skills, capacity, intelligence and health. Human development is a broader concept about enhancing an individual’s potential by polishing his skills and ensuring his rights. 
  • ✓Theme: The central theme of human capital revolves around increasing labour productivity via education and health; however, human development focuses on enabling an individual to live a healthy life and make better decisions by enhancing his capabilities. 
  • ✓Impact on one another: An increase in human capital improves human development, whereas working on human development does not always produce human capital. 
  • ✓Role of health and education: Education and health are only important as they increase individuals’ productivity, whereas an increase in productivity through education and health is not the only determinant of human development. 
  • ✓Nature of concept: Human capital is solely economic, but human development is more of a social concept. 
  • ✓Measurement: Human capital is measured through factors such as gross investment in education and health or future income. In contrast, human development is measured through HDI.

Thus, it can be seen that the two terms’ Human Capital’ and ‘Human Development’ are different in their meaning, purpose, scope, nature, and impact. Moreover, their measurement metrics also vary, with one focusing on the economy while the other concentrating on the overall well-being of an individual, with the economy presenting one part of the whole.

“Human capital is the sum of skills and knowledge; human development is the journey of unleashing the full potential of those capabilities.”

Amartya Sen

5-Relationship between Human Capital and Human Development

Delving into their interplay, there is a complex relationship between human capital and human development; they influence and, sometimes, supplement each other. 

Human Capital

There are a number of ways in which building human capital results in human development. First, when investment is made in human capital, the skills of individuals are developed, which would, in turn, result in human development. This is because the individuals would be better positioned to have a better, independent life. Second, their personal grooming will result in their professional development, which is beneficial for society as a whole. Third, economic growth through human capital would improve living standards. Fourth, healthy and educated people are better suited to work towards societal progress. Therefore, investment in human capital enhances the human development of society.

Human Development

In a similar manner, human development can also result in human capital. When individuals, especially women and marginalized individuals, are empowered, they can make their own decisions and spend on their health and education, enhancing society’s human capital. Moreover, when there is human development, by investing in the health and education of the individuals, their skills are enhanced, resulting in professional growth, which improves human capital. Furthermore, human development reduces society’s income gap and poverty level, making individuals invest more in their well-being and skills acquisition, improving human capital. Thus, human development also results in human capital development, and both concepts are vital for the well-being of individuals and society. 

6-Human Capital Development in Pakistan

Current Situation of Human Capital Development in Pakistan

Currently, Human Capital Development is a prerequisite for the economic development of a country. The Human Capital Index (HCI) introduced by the World Bank measures how much human capital would be attained by a child born today at 18. Pakistan must continue working on its human capital development like other developing countries to ensure much-needed economic progress. The presence of human capital in Pakistan can be gauged by looking at its HCI, which is 0.41 as of 2020. This implies that a child born in Pakistan would only be 41% productive at the age of 18, even when given complete educational and health facilities. And it ranks 118th out of 130, with the lowest ranking among South Asian countries. These stats present a dismal scenario of the human capital development in the country.

“In the Fourth Industrial Revolution, human capital is the driving force of innovation. Nations that invest in their people’s skills and adaptability will thrive.”

Klaus Schwab

Challenges facing Human Capital Development in Pakistan

Overviewing the challenges, investment in education, training, health, Information and Communication Technology (ICT), and other factors is required to develop human capital. In the case of Pakistan, investment in such factors is minimal, resulting in meagre human capital development. Starting with education, Pakistan spends only 1.7% of its GDP on education, and there is a low rate of enrollment in primary, secondary and tertiary sectors, with the number of students leaving the institutes with each passing year. According to UNICEF, 22.8 million children are out of school in Pakistan. Similarly, the government spends only 1.4% of GDP in the health sector. The infant mortality rate is 63 deaths per 1000 live births, according to UNICEF data. These health and education statistics show Pakistan’s dismal condition of human capital.

Pakistan’s Case Study

The indicators that the World Bank uses also paint a bleak picture in the case of Pakistan. For example, when the probability of survival to age five is considered, 93 out of 100 children survive till the age of 5. In addition, only 85% of the 15-year-olds will stay until they are 60. According to the World Bank report, “With over 20 million school-age children out of school, high levels of child malnutrition, and low empowerment of women, Pakistan’s human capital challenges are among the most serious in the world — it is a human capital crisis that is profound, silent and with far-reaching negative effects on the potential of the country and its people.” Hence, the country needs to increase human capital to reach the real potential of its people and society.

Recommendations for Building Human Capital in Pakistan

However, there is a dire need for Pakistan to work on the development of its human capital to improve its labour force productivity and output. Human Capital Review has put forward several recommendations for Pakistan. First, the government needs to develop long-term planning for building human capital, which should be continuous regardless of which political party holds the rein. Second, family planning needs to be prioritized. Third, investment should be made in reducing infant mortality rate, child malnutrition, and out-of-school children. Fourth, efforts should be made to utilize the share of GDP spent on health and education efficiently and productively. Fifth, the investment must be made in the skill development of the youth through vocational training institutes and public-private partnerships. In the long run, the country’s human capital development would improve, ensuring continuous economic prosperity and ultimately leading to human development.

“With the right policies and invest­ments, the growing working-age population can become healthier, more educated, more skilled, and more productive—and can earn more if the economy generates more and better jobs.”

Lire Ersado, World Bank’s Human Development Practice Leader for Pakistan

7-Critical Analysis

Critically, human capital plays a central role in emphasizing the importance of investment in health and education facilities for boosting the country’s individual productivity and economic growth. It empowers individuals by arguing them as the valuable asset for any country’s economic prosperity. However, the concept oversimplifies the complex nature of individuals’ skills by reducing them to measurable entities. Moreover, quantifying education and health also overlooks their qualitative nature. As far as the concept of human development is concerned, it’s a holistic approach focusing not only on the economic dimension but also on the non-economic dimensions such as social inclusion, gender parity and environmental sustainability. Nevertheless, its broadness challenges quantifying all the dimensions. For example, measuring subjective elements like happiness or cultural development poses methodological challenges, limiting the precision of assessments. Hence, there is a need for constant refinement of both these concepts to recognize the broader spectrum of human potential and societal well-being.

8-Conclusion

In a nutshell, human capital and human development are two terms that complement each other and play an essential role in the economic and societal progress of the country. On the one hand, human capital is developed by investment in the individuals’ skill-building, education, training, and health. This would result in income generation, improving the individuals’ livelihoods and generating economic growth for the country. On the other hand, human development is the enhancement of an individual’s capabilities so a healthier and fuller life can be ensured. This helps the individuals invest in their well-being and safeguard their civil and political rights. It has also been observed that human capital can result in human development and vice-versa. Thus, an economically and socially progressive country requires the growth of human capital development. 

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