YOM INSTITUTE OF ECONOMIC DEVELOPMENT

GRADUATE PROGRAM
PROJECT PLANNING AND MANAGEMENT
COURSE- Development Policies & Strategies

Project Planning and Management:

Development Policies and Strategies- PPM 511

Individual Assignment: Section/Group I

Assignment Question:

Impact of HUMAN CAPITAL on ECONOMIC

GROWTH

Done by;

Name: Chaka Yohannes:

ID: GSRH/013/13

Submitted to: Mitiku Ayele (PhD)

January 2021
Hawassa, Ethiopia
 YOM INSTITUTE OF ECONOMIC DEVELOPMENT
GRADUATE PROGRAM
PROJECT PLANNING AND MANAGEMENT
COURSE- Development Policies & Strategies

HUMAN CAPITAL AND ITS EFFECT ON ECONOMIC GROWTH

1. Human Capital? Definition

Human Capital is a measure of the skills, education, capacity and attributes of labour
which influence their productive capacity and earning potential.

According to the OECD, human capital is defined as:

“the knowledge, skills, competencies and other attributes embodied in individuals or

groups of individuals acquired during their life and used to produce goods, services or
ideas in market circumstances”.
 Individual human capital – the skills and abilities of individual workers
 Human capital of the economy – The aggregate human capital of an economy,
which will be determined by national educational standards.

OECD stands for The Organisation for Economic Co-operation and

Development  and is an intergovernmental economic organisation with
37 member countries, founded in 1961 to stimulate economic progress and world
trade. It is a forum of countries describing themselves as committed
to democracy and the market economy, providing a platform to compare policy
experiences, seek answers to common problems, identify good practices and
coordinate domestic and international policies of its members. Generally, OECD
members are high-income economies with a very high Human Development
Index (HDI) and are regarded as developed countries. As of 2017, the OECD
member countries collectively comprised 62.2% of global nominal
GDP (US$49.6 trillion) and 42.8% of global GDP (Int$54.2 trillion) at purchasing
power parity. The OECD is an official United Nations observer.

Importance of human capital

 Structural unemployment. Individuals whose human capital is inappropriate for
modern employers may struggle to gain employment. A major issue in modern
economies is that rapid deindustrialisation has left many manual workers,
struggling to thrive in a very different labour market.
 Quality of employment. In the modern economy, there is increasing divergence
between low-skilled, low-paid temporary jobs (gig economy). High-skilled and
creative workers have increased opportunities for self-employment or good
employment contracts.
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 Economic growth and productivity. Long-term economic growth depends

increasingly on improvements in human capital. Better educated, innovative and
creative workforce can help increase labour productivity and economic growth.
 Human capital flight. An era of globalisation and greater movement of workers
has enabled skilled workers to move from low-income countries to higher income
countries. This can have adverse effects for developing economies who lose their
best human capital.
 Limited raw materials. Economic growth in countries with limited natural
resources, e.g. Japan, Taiwan and South East Asia. Rely on high-skilled,
innovative workforce adding value to raw materials in the manufacturing process.
 Sustainability ”what we leave to future generations; whether we leave enough
resources, of all kinds, to provide them with the opportunities at least as large as
the ones we have had ourselves” (UN, 2012)

Factors that determine human capital

1. Skills and qualifications
2. Education levels
3. Work experience
4. Social skills – communication
5. Intelligence
6. Emotional intelligence
7. Judgement
8. Personality – hard working, harmonious in an office
9. Habits and personality traits
10.Creativity. Ability to innovate new working practices/products.
11.Fame and brand image of an individual. e.g. celebrities paid to endorse a
product.
12.Geography – Social peer pressure of local environment can affect expectations
and attitudes.

2. Relationship between Human Capital and Economic Growth?

Human capital and economic growth have a strong correlation. Human capital affects
economic growth and can help to develop an economy by expanding the knowledge and
skills of its people.

Human capital refers to the knowledge, skill sets, and experience that workers have in
an economy. The skills provide economic value since a knowledgeable workforce can
lead to increased productivity. The concept of human capital is the realization that not
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everyone has the same skill sets or knowledge. Also, the quality of work can be
improved by investing in people's education.

What Drives Economic Growth?

Economic growth is an increase in an economy's ability, compared to past periods, to
produce goods and services. Economic growth is measured by the change in the gross
domestic product (GDP) of a country. GDP is a representation of the total output of
goods and services for an economy. For example, if a country has a GDP rate of 2.5%
for the year, it means the economic growth of the country rose by 2.5% from a year
earlier. In order to determine how human capital impacts growth, we must first look at
two key drivers of economic growth in an economy.

Consumer Spending
It's estimated that consumers are responsible for more than two-thirds of the economic
growth in the U.S. economy. As consumers become employed or experience wage
increases, they tend to increase their purchases of clothes, cars, technology, homes, and
home goods such as appliances. All of that spending creates a positive ripple effect
leading to improved employment in various industries such as retail, auto
manufacturers, technology stores, and home builders, to name a few. The spending also
leads to higher GDP growth throughout the economy.

Business Investment
The increased GDP growth from consumer spending leads to improvements in business
conditions. As companies become more profitable, they tend to invest more money into
their businesses to create future growth. Business investment can include new
equipment and technology purchases. The investments businesses make are
called capital investments. Capital investments, which require large outlays of capital or
cash, are designed to boost a company's productivity and profits in the long term.

Thus:

 Human capital affects economic growth and can help to develop an

economy by expanding the knowledge and skills of its people.
 The level of economic growth driven by consumer spending and business
investment determine the amount of skilled labour needed.
 Investing in workers has had a track record of creating better employment
conditions in economies throughout the world.
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In a growing economy, companies also take on additional borrowing from banks to

expand production due to higher consumer demand. The loan proceeds are usually used
for large purchases of assets such as manufacturing plants and equipment. The added
production also leads to higher wages and increased employment as more workers are
needed for the increase in consumer demand for a company's products.

As companies look to hire workers to help with the increase in sales, it leads to new job
openings in various types of employment. However, if the labour market becomes too
tight, due to an expanding economy, companies are forced to train workers for the
skillsets needed since there aren't enough available skilled workers.

As a result of business investment, companies are more productive, while GDP growth
rises since business investment is a key component of growth. Both consumer spending
and business investment, not only lead to more economic growth, but also play a
prominent role in determining the level training and development of workers.

Human Capital and Economic Growth

Human capital is positively correlated to economic growth since investment tends
to boost productivity. The process of educating a workforce is a type of
investment, but instead of capital investment such as equipment, the investment is
in human capital.

The Government's Role

The role of governments is key to expanding the skillsets and education levels of a
country's population. Some governments are actively involved in improving human
capital by offering higher education to people at no cost. These governments realize that
the knowledge people gain through education helps develop an economy and boost
economic growth. Workers with more education or better skills tend to have higher
earnings, which, in turn, increases economic growth through additional consumer
spending.

The Corporate Sector's Role

Companies also invest in human capital to boost profits and productivity. For example,
let's say an employee working at a technology company receives training to be a
computer programmer through on-site training and in-house seminars. The company
pays for a portion of the tuition for higher education. If the worker remains at the
company after the training has been completed, she may develop new ideas and new
products for the company. The employee might also leave the company later in her
career and use the knowledge she learned to start a new company. Whether the
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employee remains at the firm or starts a new company, the initial investment in human
capital will ultimately lead to economic growth.

Human Capital Investments and Employment Growth

Investing in workers has had a track record of creating better employment conditions in
economies throughout the world. If employment is improving, consumer spending rises,
leading to increased revenue for companies and additional business investment. As a
result, employment is a key indicator or metric for determining how GDP growth may
perform.

OECD routinely analyses the impact of education levels on employment and ultimately,
economic growth. The OECD's 2020 annual Education at a Glance report reviewed how
education systems operate, the level of spending, and who benefited or participated.3
The OECD also measures how increases in education for men and women drive
employment growth. 

In 2020, the OECD found that for countries with people that had grammar and high
school educations experienced an employment rate among 25-34 year-olds of 72% for
men and 45% for women. However, for those who had college or graduate education
levels experienced an employment rate of 89% for men and 81% for women.4

Although investment in human capital tends to produce more growth, it doesn't

necessarily mean the jobs are available for the newly-educated workers. Also,
geography plays a role when it comes to job openings and the movement of labour. If
job openings are located in the northern part of a country, but the skilled labour is in the
south, growth could be hindered due to the cost of moving or the lack of desire to move.

3. Challenges and Problems related to development of Human Capital

The challenge of human capital development for a developing country like Ethiopia is
enormous. This is in view of how far and ahead the rest of the world is and the amount
of efforts and resources needed to catch up with them. Ethiopia's high population, vast
socio-cultural diversity, yet to mature political culture and the great hope reposed on her
to emancipate the black-race makes the challenge even more critical for us. The
following are some of the challenges of human capital development in most of
developing countries.

 Low Rating in Human Development Indices:

 Brain Drain:
 Underemployment:
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While there are many benefits to investing in the formation of human capital in LDCs
(less developed countries), it is not an easy process. Large populations deal with large
issues.

Problems of human capital formation in LDCs include:

I. Faster increase in population: The population of almost all developing countries
in the world (including Pakistan) is increasing faster than the rate of accumulation
of human capital. As a result, these countries are not making satisfactory use of
sector expenditure on education (which has accounted for 2.5% of LDC GDP
over the last five years).
II. Defective patterns of investment in education: In the developing countries of
the world, the governments are giving priority to primary education for increasing
their literacy rates. Secondary education, which provides critical skills needed for
economic development, remains neglected. Another problem related to
investment in education is that in the public and private sectors there is a
mushroom growth of universities. These universities are a major cost to these
countries. There are also mass failures at primary, secondary, and higher levels of
education that result in the wasting of scarce resources that the country needs for
other kinds of development.
III. More stress on the provision of buildings and equipments: Another major
problem countries run into when investing in human capital in developing
countries is that politicians and administrators lay more stress on the construction
of buildings and the provision of equipments than on the provision of qualified
staff. It has been observed that foreign qualified teachers and doctors are
appointed in rural areas, where there is little use for them. This misallocation of
educational resources can negatively affect economic growth.
IV. Shortage of health and nutrition facilities: In less developed countries there is a
shortage of trained nurses, qualified doctors, medical equipment, medicines, etc.
Having less availability to health facilities poses a threat to millions of the people.
The people are faced with unsatisfactory sanitary conditions, polluted water, high
fertility and death rates, urban slums, illiteracy, etc. All of these deficiencies
affect the health of the people and reduce their life expectancy. This reduces the
growth of human capital.
V. No facilities for on the job training: On the job training (in service training) is
essential for improving or acquiring new skills. The result is that the efficiency of
the workers and the knowledge held by the workers causes a growth in human
capital. The competence of the workers is of the utmost importance for the
efficient use of human resources.
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VI. Study programs for adults: Study programs for adults can also be introduced in
order to improve a country's literacy rate. Study programs for adults have been
introduced in many under developed countries around the world (including
Pakistan). They provide basic education, which increases the skills of farmers and
small industrialists. Unfortunately, this scheme failed miserably, as the adults
showed no interest in getting such training.
VII. Halfhearted measures for promotion of employment: Throughout most of the
world, the ratio of unemployed or underemployed persons is very large. To
increase employment and reduce under employment, proper investment in human
capital is required. This is visibly lacking in LDCs.
VIII. Failure to plan for the best use of manpower: Due to the nonavailability of
reliable data, there is little manpower planning in less developed countries. As a
result, the demand for certain skills and the supply of those skills do not match.
The result is that large numbers of skilled and highly qualified workers remain
underemployed. The frustration and discontent among the unemployed and
underemployed graduate and post graduates results in "brain drain." This is when
skilled workers leave the country for better opportunities abroad. It is a huge loss
in human resources for these developing countries.
IX. Neglect of agriculture education: In LDCs where agriculture is the main sector
of the economy, very little attention is paid to educating the farmers on how to
use modern agricultural practices. Unless the farmers are provided agricultural
education and training, they will not be able to raise the agricultural output and
balance supply and demand.

4. Appropriate Policies and Strategies to develop Human Capital

I. Attract talent by showcasing opportunities, improving brand image and

changing the work environment.
Since the power sector is unable to attract the best available talent despite the fact
that this is a sector that offers good salary and benefits packages, has relatively
structured training & development programs, has several organizations with good
employer reputation and, most importantly, with immense opportunities for a
meaningful career. The power industry needs to showcase these opportunities and
create awareness among the young talent pool. Industry groups as well as large
companies in the sector need to work on creating a positive brand image for the
industry in order to attract fresh talent. Further, companies should work on
changing the work environment through better human resource practices, soft
skills training, reducing hierarchical barriers and creating career development
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maps for the personnel. Experienced HR managers from other sector should be
inducted to incorporate best practices from other sectors.

II. Expand training to cover behavioural & attitudinal changes

The training interventions, education upgradation plans and management
development programs designed for personnel should ensure holistic all-round
development of the personnel. One of the comprehensive models for training, the
360º Training Model shown below, provides a platform not just for functional skill
development but incorporating behavioural and attitudinal orientation while creating
an appreciation of the commercial aspects of business. While companies are
generally able to offer core functional training, behavioural and attitudinal training
expertise is lacking in a majority of the firms. Hence, companies should seek to
ensure that the training is not limited to narrow functional role perspectives but
overall organisational and social perspectives as well.

360º EDUCATION/TRAINING MODEL©

Behavioural Attitudinal

3600

Functional Commercial

© ©Dr.B.S.K.Naidu
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III. Strengthen it is (Industrial Training Institutes) and other vocational skill

development centres

Given the current requirement for a large number of manpower for project
construction, ITIs can be strengthened and utilised better for the development
of skilled construction workers as well as Operation and Maintenance
personnel with the help of the existing players in the industry. Adoption of
ITIs close to large project sites would allow the companies to both recruit local
manpower and also create goodwill by providing employment opportunities to
the project affected people. The Government can also consider collaborating
with specialist training service providers for operating the it is

IV. Standardise curriculum and develop certification standards

It is important to standardise the curriculum for training of skilled and semi-

skilled workers in order to effectively train many workers. Certification
standards must be developed and implemented in order to ensure consistency
in quality. In addition, having standard certified programs will allow multiple
specialist training service providers to offer these courses to a wider cross-
section as employment-oriented programs and prepare a steady pool of
qualified manpower taking the burden off the limited available infrastructure.

V. Expand existing training facilities and create new infrastructure

While the National Power Training Institute and the training centres and some
of the state utilities cater exclusively to the training needs of the Power sector,
they are not sufficient to meet the training needs of the sector. New training
infrastructure needs to be created urgently in order to avoid a manpower crisis
that is already looming large. This can be done by;
 Providing incentives to existing training institutions in both the public
and private sectors to conduct specific programs
 Encouraging the private sector to set up new training infrastructure with
attractive incentives such as land at concessional rates, grants and loans
 Creating centres of excellence which can act as resource centres for
other institutions
 Introducing new applied programs at existing academic and industrial
institutions
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VI. Ensure proper utilisation of funds through direct payments

A major cause of the lack in development of training infrastructure is due to
mindset that training facilities are cost centres and are non-critical. With most
of the utilities in the past being loss making, training budgets were usually
curtailed. It is precisely for this reason that the NTP mandated a minimum
allocation of 1.5% of salary expenses towards training. Investment in training
can be increased through directed measures like the following:
 Part reimbursement of training expenses directly provided to training
institutes by the Central Government
 Apportioning of training budgets to a special Training & Development
fund by the regulators and direct reimbursement to the training institutes
in order to ensure proper utilisation of these funds

VII. Introduce electives at graduate engineering programs and specialised

programs at post-graduate level
 Introducing electives at graduate level would help generate interest in
the Power sector as well as provide sound theoretical base for the
engineers seeking to enter it
 Degrees in renewable energy, environment management, and energy
efficiency should be provided in universities and leading academic
institutions like at post-graduate level
 R&D centres should be established in academic institutions to develop
knowledgebase in emerging areas like solar energy, smart grids, etc.

VIII. Create awareness on energy efficiency among all stakeholders and

incorporate mandatory training for personnel involved in energy intensive
processes

Awareness on energy efficiency needs to be propagated to all stakeholders

from retail consumers to the managements of firms. Awareness on energy
efficiency across the value chain is critical for preserving scarce resources,
reducing pollution as well as increasing profitability for businesses. The
measures to improve awareness should include:
 Orientation programs for key decision makers
 Mass awareness campaigns reaching out to different consumer groups
 Mandatory training for operators of energy intensive processes
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 Incorporating energy conservation measures it in to school and college

curriculum

Finally, for the strategies to be successful and for development

of the Power sector, it is important for all the stakeholders to
recognise the importance of developing human capital and
invest in it.

Conclusion

Impact of Human Capital on Economic Growth

When we talk about economic growth, human capital is the main reason for
accelerated growth and expansion for many countries, which provide investment in
human capital. This gives the best advantages to these countries for providing the
best situation for work and life.
A significant advantage in generating a stable environment for growth is that the
nation has the expanded high-quality human capital in fields like health, science,
management, education, and other fields. Here the main components of human
capital are definitely human beings, but presently, the principal component is
creative, an educated, and enterprising person, with a high level of
professionalism.
The human capital in the economy manages the central portion of the national wealth
of the country. Hence, all researchers consider that human capital is the most
important resource of the community, more powerful than natural or wealth. In most
countries, human capital determines the rate of development, economic,
technological and scientific progress.
(i) Inventions, Innovations and Technological Improvement
1. It will lead to more innovations in the areas of production and related
activities.
2. Innovation leads to more growth.
3. It also creates the ability to absorb new technologies.
(ii) Higher Productivity of Physical Capital
1. Human capital increases labour productivity.
2. Trained workers will use the physical capital (like machines etc.) more
efficiently.
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(iii) Raises Production

1. Human capital formation raises production levels and leads to economic
growth by adding to GDP.
2. Knowledgeable and skilled workers can make better use of resources at their
disposal.
(iv) High Rate of Participation and Equality
1. By improving productive measures of the labour force, human capital
formation increases excellent employment.
2. This leads to a high rate of participation in the labour force.
3. It reduces the gap between poor and rich.
(v)Improves the Quality of life
1. Quality of life is indicated by income and health.
2. Income and health depend upon the level of education, skill formation, etc.
3. Human capital formation increases these skills and improves the quality of
life of masses.
4. Better quality of population means more economic growth.
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United Nations Development Programme, UNDP (2004). Human Development Report

Akingbade, B. (n.d). Meeting the challenges of human capital development in Nigeria -the case for reforms
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Barro, R. 1991, Economic growth in a cross-section of Countries, Quarterly Journal of Economics, vol.106
(May), pp. 407-443

Benhabib J., Spiegel M.M, 1994 ,The Role of human capital in economic development. Evidence from
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De la Fuente Á, Cicoone A, 2002, Human capital in a global and knowledge-based economy, Final Report,
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Ederer P., Schuler P, Willms S, 2007, The European Human Capital Index: The Challenge of Central and
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Englander, S Gurney, A, 1994, Medium-term determinants of OECD productivity. OECD Economic

Studies 22,Spring 1994, pp. 111-129

Izushi H., Huggins R., 2004, Empirical analysis of human capital development and economic growth in
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Mankiw N. G; Romer D, Weil D.N, 1992 Contribution to the Empirics of Economic Growth, The
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Mincer J, 1995, Economic Development, Growth of Human.Capital, and the Dynamics of the Wage
Structure, 1994-95 Discussion Paper Series No. 744, (September), Columbia University, p.38 .