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This paper deals with the effect of education on economic growth. It studies education as a factor of economic growth and sustainable development. It aims to reveal the relationship between education and growth of the economy. This study explores the correlation between education and economic growth in Pakistan by using time series data on real gross domestic product and education from 1980 to 2014 were used.
The findings of this study indicate the existence of a positive relationship between education and economic growth. The effect of primary and secondary education both are included in this paper. It is revealed in this paper by the results that among these levels of education, generally higher education i.e. secondary education causes economic growth highly and most significantly.
This study recommends more investment in education sector so that economic growth can be further accelerated, that in turn, leads to further education and hence economic growth. Progress and prosperity of a country depend upon the educational choices available to the masses.
Education not only trains the young ones to understand and cope with the complexities of economic growth but also serves as a lever for its enhancement. It guarantees the quality of human life which ensures socioeconomic growth in a country. Asian countries such as South Korea, India, and China have achieved wonderful economic growth in the last few decades through agricultural and educational reforms.
Education is generally considered as a powerful tool in reducing poverty, enhancing economic growth, empowering people, improving private earnings, promoting a flexible and healthy environment and creating a competitive economy. It plays a vital role in shaping the way in which future generations learn to cope with the complexities of economic growth.
Educational institutions prepare the citizens to be able to participate actively in all walks of life including economic activities. Human capital has proved itself to be one of the most important determinants of sustainable economic growth and hence development. The positive and significant contribution of human capital through education development is being well recognized. Most of the studies on education and productivity witness their significant positive correlation. Education plays an important role in human capital formation. It raises the productivity and efficiency of individuals and thus produces skilled manpower that is capable of leading the economy towards the path of sustainable economic development. Education is considered one of the basic indicators of development.
The Human Development Index, an index measuring socioeconomic development is based on combining measures of education, health and adjusted real income per capita. This shows that education is an important measure of development. Education is also an important measure of multidimensional poverty. Increase in education has a direct effect on the growth of the economy and therefore leads to sustainable development. As to strengthen human capital a country needs to provide education to its population. Many countries have placed greater emphasis on developing an education system that can produce workers able to function in new industries, such as those in the fields of technology and science. This is partly because older industries in developed economies were becoming less competitive, and thus were less likely to continue dominating the industrial landscape. In addition, a movement to improve the basic education of the population emerged, with a growing belief that all people had the right to an education. Countries with a greater portion of their population attending and graduating from schools see faster economic growth than countries with less-educated workers.
As a result, many countries provide funding for primary and secondary education in order to improve economic performance. In this sense, education is an investment in human capital, similar to an investment in better equipment.
According to UNESCO and the United Nations Human Development Programme, the ratio of the number of children of official secondary school age enrolled in school, to the number of children of official secondary school age in the population (referred to as the enrollment ratio), is higher in developed nations than it is in developing ones. This differs from education spending as a percentage of GDP, which does not always correlate strongly with how educated a country’s population is. Therefore, a country spending a high proportion of its GDP on education does not necessarily make the country’s population more educated. Ever since Pakistan’s independence, it has faced many challenges. These challenges are hindrances in the way of its economic growth and development. Pakistan has suffered immensely as a result of this fragmented educational system coupled with issues of access, quality, and governance. Pakistan’s primary and secondary enrolment ratios in 1991 were 46 and 21 percent of the relevant age groups – only one-half the average for all low-income countries. Only about half of those who enrolled in school stayed on until the fourth grade in comparison with an average of about two thirds for all low-income countries Within the South Asia region, Pakistan lags well behind its neighbors in enrolment; net primary enrolment rates are 50% in Pakistan, 75% in Bangladesh, 77% in India and 100% in Sri Lanka. By all criteria, Pakistan’s educational system was at the bottom of the international ladder. The gender gap in education in Pakistan suggests that the country has foregone a great opportunity by not capitalizing on the large rates of return of female schooling on economic productivity. In a study of estimates of wage relations for males and females separately over several time periods using Household Income and Expenditure Surveys, it was found that females had higher rates of return than their male counterparts. Some estimates suggest that the return on getting more girls into schooling may be over 20 percent.
Another study estimated that annual growth in income per capita could have been nearly a percentage point faster if Pakistan had closed the gender gap as fast as East Asia between 1960 and 1992. Pakistan thus missed economic opportunities that have been exploited by many developing countries by increasing educational levels for the bulk of its labor force and, thus, enhancing their household incomes and reducing poverty. What is more disturbing is that the low net enrolment ratios will make the achievement of 100 percent literacy levels even more difficult in the future.
This has serious implications for Pakistan’s competitiveness and rapid poverty reduction.
Education is one of the most powerful instruments for reducing poverty and inequality and lays a foundation for sustained economic growth. The literature on economic growth provides significant evidence of the importance of human capital accumulated by education. Education, one of the most important ingredients of human capital is considered an important determinant of sustainable economic growth. Productivity can be enhanced by investing more in education. Human capital is the key component for boosting productivity which leads to higher economic growth (Lucas, 1988; Romer, 1990). Human capital directly or indirectly serves as the determinant of economic growth. Education as components of human capital improves the socio-economic factors.
Education possesses multidimensional impacts on human beings and the economy. It influences positively on the economic growth and employability of the persons while on the other hand it also helps in shaping the behavior of society to promote a cordial political, social and economic environment which provides the basis for further domestic and foreign investments in the country. As one of the most important components of human capital, improvements in educational status are the source of significant increases in individual earnings with the contributions to business life such as increasing productivity, and thus the wages and employment opportunities of the individuals, whereas the risk of unemployment is decreased. (Mercana; Sezer, 2014).
Mehmet Mercana and Sevgi Sezerb test the effect of education expenditure on economic growth by utilizing the bounds test approach on 1979-2012 periods annual data. They, therefore, conclude that the improvements in educational level affect the economic growth positively by increasing both the labor productivity and the capacity for knowledge production. A country’s economy becomes more productive as the proportion of educated workers increases since educated workers are able to more efficiently carry out tasks that require literacy and critical thinking. As stated earlier, better-educated workers tend to be more productive than less educated ones. However, obtaining a higher level of education also carries a cost. A country doesn’t have to provide an extensive network of colleges or universities in order to benefit from education, it can provide basic literacy programs and still see economic improvements. There are several approaches to the relationship between education and education expenses and growth in literature.
Among these, in the Neo-classical approach, economic growth is expressed with the human capital factor included in the model and the role of human capital is highlighted in the process of income differences between countries and convergence (Gms, 2005:100). According to certain opinions, economy, economic approach is accused of intellectual imperialism whereas the economist’s approach is becoming increasingly used by researchers to analyze phenomena and behaviors outside of this domain: education, bureaucracy, politics, history. The fact that the economic approach an explanation of human behavior is extremely fertile is proven by performance in research of Nobel awarded for economy Gary S. Becker. Muhammad Afzal, Hafeez Ur Rehman, Muhammad Shahid Farooq and Kafeel Sarwar in their 2011 study of education and economic growth in Pakistan test the cointegration between education and economic growth was investigated using ARDL approach and the causal linkage between education and economic growth was examined in bivariate, trivariate and tetraborate TYAGC framework.
The causality between education and economic growth was examined in the presence and absence of stock of physical capital and stock of labor as a third and fourth variable. The causality results indicate that there exist two-way causality between education and economic growth, and between all levels of education and economic growth in case of the bivariate TYAGC framework. The concept of human capital reflects the investment in education and the development of some competencies and skills necessary to accomplish a certain economic activity (Neamtu; 2015). Countries with a greater portion of their population attending and graduating from schools see faster economic growth than countries with less-educated workers.
As a result, many countries provide funding for primary and secondary education in order to improve economic performance. In this sense, education is an investment in human capital, similar to an investment in better equipment. According to UNESCO and the United Nations Human Development Programme, the ratio of the number of children of official secondary school age enrolled in school, to the number of children of official secondary school age in the population (referred to as the enrollment ratio), is higher in developed nations than it is in developing ones. This differs from education spending as a percentage of GDP, which does not always correlate strongly with how educated a country’s population is.
Therefore, a country spending a high proportion of its GDP on education does not necessarily make the country’s population more educated. Most attention to the value of schooling focuses on the economic returns to different levels of school attainment for individuals. These studies have uniformly shown that more schooling is associated with higher individual earnings. The rate of return to schooling across countries is centered at about 10%, with returns higher for low-income countries, for lower levels of schooling, and frequently for women. The conventional theory of human capital developed by Becker (1962) and Mincer (1974) views education and training as the major sources of human capital accumulation that, in turn, have a direct and positive effect on individuals’ lifetime earnings.
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