"

MEANING AND IMPORTANCE OF HUMAN CAPITAL FORMATION*

The term human capital formation refers to the “process of acquiring and increasing the numberof
persons who have the skills, education and experience which are critical for the economicand the
political development of a country. Human capital formation is thus associated withinvestment in man
and his development as a creative and productive resource.”

According toSchultz, there are five ways of developing human resources: “(

) health facilities and services, broadly conceived to include all expenditures that affect thelife
expectancy strength and stamina, and the vigour and vitality of the people; (

ii

) on-the-job training, including old type apprenticeships organised

by

firms;(

iii

) formally organised education at the elementary, secondary and higher levels;

(iv)

study programmes for adults that are not organised by firms, including extensionprogrammes notably in
agriculture;(

I’mv) migration of individuals and families to adust to changing job opportunities.”may be added the
import of technical assistance, expertise and consultants. In its wider sense, investment in human capital
means expenditure on health, education and social services ingeneral; and in its narrower sense, it
implies expenditure on education and training. It has become conventional to talk about investment in
human resources in its narrower sense becauseexpenditure on education and training is capable of
measurement as compared to theexpenditure on social services.The notion of investment in human
capital is of recent origin. In the process of economic growth,it is customary to attach more importance
to the accumulation of physical capital. Now it isincreasingly recognised that the growth of tangible
capital stock depends to a considerableextent on human capital formation which is the “process of
increasing knowledge, the skillsand the capacities of all people of the country.”

3
Studies made by

Schultz, Harbison, Denison,Kendrick, Abramovitz, Becker, Bowman, Kuznets

and a host of other economists reveal thatone of the important factors responsible for the rapid growth
of the American economy has been the relatively increasing outlays on education. They tell us that a
dollar invested oneducation brings a greater increase in national income than a dollar spent on dams,
roads,factories or other tangible capital goods. In

Prof. Galbraith’s

words, “We now get the largerpart of our industrial growth not from more capital investment but from
investment in menand improvements brought about by improved men.” Even earlier economists like
Adam Smith,Veblen and Marshall stressed the importance of human capital in production. Adam
Smithincluded in a country’s stock of fixed capital ‘the acquired and useful abilities of all theinhabitants.’
To Veblen technological knowledge and skills formed the community’s ‘immaterialequipment or
intangible assets’ without which physical capital could not be utilized productively.Marshall regarded
education “as a national investment “and” the most valuable of all capital isthat invested in human
beings.” Economists are, therefore, of the view that it is the lack ofinvestment in human capital that has
been responsible for the slow growth of the LDCs. Unlesssuch economies spread education, knowledge,
and know-how, and raise the level of skills andphysical efficiency of the people, the productivity of
physical capital is reduced.Underdeveloped countries are faced with two diverse manpower problems.
They lack the criticalskills needed for the industrial sector and have a surplus labour force. The existence
of surpluslabour is to a considerable extent due to the shortage of critical skills. So these diverse
problemsare interrelated. Human capital formation aims at solving these problems by creating
thenecessary skills in man as a productive resource and providing him gainful employment.The need for
investment in human capital formation in such economies is more obvious fromthe fact that despite the
massive import of physical capital they have not been able to acceleratetheir growth rates because of
the existence of undeveloped human resources. Of course, somegrowth is possible from the increase in
the conventional capital even though the available labourforce is lacking in skills and knowledge. But the
growth rate will be seriously limited withoutthe latter. Human capital is, therefore, “needed to staff new
and expanding government services,to introduce new system of land use and new methods of
agriculture, to develop new means ofcommunication, to carry forward industrialization, and to build the
educational system. Inother words, innovation or the process of change from static or traditional
society, requiresvery large doses of strategic human capital.”Physical capital becomes more productive
if the country possesses sufficient human capital.Underdeveloped countries are strongly committed to
the programmes of constructing roads,

3. F.H. Harbison and C. A. Meyers,

Education, Manpower and Economic Growth,

1964

dams, power houses, factories pertaining to light and heavy industries, hospitals, schools,colleges, and a
host of other activities associated with development planning. For this, theyneed engineers, technicians,
technical supervisors, managerial and administrative personnel,scientists, doctors, nurses, veterinarians,
agronomists, accountants, statisticians, economists,secretaries, stenographers, etc. If there is a dearth
of this varied type of human capital, physicalcapital cannot be productively utilized. As a result,
machines breakdown and wear out soon,materials and components are wasted and the quality of
production falls.Moreover, underdeveloped countries import physical capital for development but they
areunable to utilise it fully due to the lack of the “critical skills” required for its operation.
Thoughtechnical know-how and skills usually come with foreign capital, yet it is insufficient to meetthe
diverse and varied requirements of such economies. Thus the failure of human capital togrow at the
rate of physical capital has been responsible for the low absorptive capacity of thelatter in
underdeveloped countries. Hence the need for investment in human capital becomesof paramount
importance in such countries.LDCs are characterized by economic backwardness which manifests itself
in “low labourefficiency, factor immobility, limited specialisation in occupations and in trade, a deficient
supplyof enterpreneurship and customary values and traditional social institutions that minimise
theincentives for economic change. The slow growth in knowledge is an especially severe restrainton
progress. The economic quality of the population remains low when there is little knowledgeof what
natural resources are available, the alternative production techniques that are possible,the necessary
skills, the existing market conditions and opportunities, and the institutions thatmight be created to
favour economising effort and economic rationality.” To remove economic backwardness and instill the
capacities and motivations to progress, it is necessary to increasethe knowledge and skills of the people.
In fact, without an improvement in the quality of humanfactor no progress is possible in an
underdeveloped country. As aptly emphasized by Schultz,“It is as if we had a map of resources which did
not include a mighty river and its tributaries.The particular river is fed by schooling, learning on-the-job,
advances in health, and the growingstock of information of the economy.”Investment in human capital
is also required to raise the general living standards of the peoplein LDCs. This is possible when
education and training make fuller and rational utilisation ofsurplus manpower by providing larger and
better job opportunities in both rural and urbanareas. These, in turn, raise income and living standards
of the people.

PROBLEMS OF HUMAN CAPITAL FORMATION

The concept of human capital formation in the context of investment in education poses a numberof
problems. How much is the total stock of human capital required? At what stage ofdevelopment is it
needed the most? What should be its rate of accumulation? What type ofeducation should be imparted,
to what extent, and at what time? And how should the returnfrom educational investment be
measured?It is difficult to assess the total stock of human capital required in an underdeveloped
country. Infact, this problem is associated with the next one, of determining the

Stage when it is needed themost. The growth of western European countries and the USA has been
based more oninvestment in physical capital than in human capital in their earlier phases of
development. Butin the case of underdeveloped countries the need for human capital in the form of
educated

4. T.W. Schult, ‘Reflection on Investment in Man’,

JPE,

October, 1962.
persons in different vocations is greater to provide the missing components in the initial stagesof their
development. As they install complex equipment and methods of production, personswith critical skills
are more important than mere arts graduates. There is greater need forentrepreneurs, business
executives, administrators, scientists, engineers, doctors, etc. But it isdifficult to increase their supply
because “their basic function is to change the economicorganisation of the country in more productive
directions instead of being fitted into a givenframework.”It is not possible to spell out in concrete terms
the growth rate of human capital formation, as iscommonly the case with physical capital accumulation.
However, it can be said in general termsthat the rate of accumulation of human capital should exceed
not only the growth rate of labourforce but also the growth rate of economy. According to Harbison, in
most countries the rate ofincrease in scientific and engineering personnel should be at least

three times that of the labourforce, and atleast twice in the case of clerical personnel, craftsmen, top
managerial andadministrative personnel. On the other hand, the ratio of the annual increase in human
capitalto the annual increase in the national income may be as high as three to one, or even higher inthe
case of those countries where foreigners are to be replaced by citizens of the developingcountries. But
there is no empirical evidence to prove the different growth rates of humancapital needed by
underdeveloped countries at the various stages of development.So far as the

pattern of investment in education is concerned, almost all the under developedcountries of Asia, Africa
and Latin America accord a high priority to primary education whichis often free and compulsory. But it
leads to considerable wastage and stagnation and puts asevere strain on the physical facilities and
teaching personnel of educational institutions.Secondary education is, on the other hand. accorded a
low priority. It is, however, people withsecondary education who provide the critical skills needed the
most for economic development.Emphasizing the importance of secondary education, Lewis regards
persons with a secondaryeducation as “the officers and non-commissioned officers of an economic and
a social system.A small percentage goes on to university education, but the numbers required from the
universityare so small that the average country of upto five million inhabitants could manage
tolerablywell without a university of its own. The middle and upper ranks of business consist
almostentirely of secondary school products, and these products are also the backbone of
publicadministration.

But LDCs lay more emphasis in providing primary education on a mass scale.Underdeveloped countries
in their enthusiasm to spread higher education have been opening too many Universities without trying
to improve the standard of education. No restrictions areplaced on higher education with the result that
the proportion of failures at the higher secondaryand university levels is very high. Mass failures and the
general lowering of academic standardstend to lower the efficiency of undergraduates and “graduates
employed both in the privateand the public sector do not promise well for the formation of a dynamic
leadership for economicdevelopment.” This leads to wastage of human resources.Moreover, there
being little manpower planning in such economies, no efforts are made tomatch the demand and supply
of different types of critical skills. As a result, “few countries cango on absorbing poorly trained
university graduates at a faster rate than their general economicgrowth. Sooner or later with their
present pattern of educational expansion, many developingcountries will have to contend with one of
the most explosive problems of discontent andfrustration, that of graduate unemployment.”
Considering the high cost of education, the
educated unemployed are a huge waste of human and material resources. Besides the
defectiveeducational system, other factors responsible for this are the lack of employment bureaux,
lowwage and salary structure, unwillingness to accept a job in rural areas or one considered belowthe
occupational hierarchy or status, and dropouts.Further, insufficient attention is paid to agricultural
education, adut, education and on-the-jobtraining programmes in such countries. There are no on-the-
job training programmes. Little isdone in the field of adult education and in educating the farmers to use
modern agriculturalpractices. Adult education helps in changing the outlook of the farmers, sharpens
their decision-making skills and provides them necessary information with regard to modern
agriculturalpractices. But these educational and training programmes require a large number of
teachersand instructors which the LDCs woefully lack.Another problem of investment in human capital is
that politicians and administrators considerit more in terms of providing buildings and equipment than
the teaching staff. In fact, the real bottleneck to the formation of human capital in LDCs is the supply of
qualified instructors andteachers.

CRITERIA FOR INVESTMENT IN HUMAN CAPITAL

One of the most ticklish problem is that of estimating the productivity of investment in humancapital
formation, especially in education. Economists have suggested the following criteria.

1. The Rate of Return Criterion.

Education as an investment has two components: futureconsumption component and future earnings
component. Investment in skills and knowledgeincreases future, earnings, while the satisfaction derived
from education is the consumptioncomponent. “As an enduring consumer component,

education

is the source of future utilitieswhich in no way enters into measured national income.”

Thus in calculating the return oninvestment in education, future earnings component is considered
discounted for interest tomeasure their present value. The method used is based on a comparison of
the average life timeearnings of more educated persons with that of persons with less education
employed in similarprofessions. For example,

Becker

estimated that the rate of return on total investment on collegeeducation in the USA for white urban
males was 12.5 per cent in 1940 and 10 per cent in 1950.It was, however, 9 per cent after deducting
taxes for both 1940 and 1950.

This estimate includeddirect cost to the student, earnings forgone during the period of studies, and
college’s share ofthe cost.

Its Difficulties.

Such estimates involve several difficulties.

First,

they measure only the direct material benefit and exclude altogether the external economiesof
education—the direct and indirect benefits accruing to the country from improvements inthe levels of
the people.

Second,

this criterion is based on a number of arbitrary assumptions such as the person’s incomeduring his life
time, the earnings from different occupations, future wage rates and futureemployment, levels.

6. We have not discussed the Cost-Benefit Criterion. For this, refer to the chapter on Project
Evaluation.Prof. G.M. Meier observes in this connection: “Any cost-benefit analysis of the “returns” to
educationmust incorporate the interactions between education and the economy giving particular
attention toeducation as an investment, the importance of rural education in a developing economy,
and theinterdependence between education, manpower requirements and development.”

(Leading Issues inEconomic Development,

1976).7. T.W. Schultz. op.

cit.

8. G.S. Becker, ‘Under Investment in College Education,

AER,’

May 1960.

Human Capital Formation and Manpower429

Third,

the decisions to invest in education and training are not governed by the rate of returncriterion alone
but by social welfare.

Fourth,

what people earn is not exclusively due to university education, rather it is the result ofnatural ability,
experience, social status, family connection, on-the-job training, etc.

Fifth,

such estimates measure only private rates of return, on investment in education. Theyindirectly
measure the effects of education on the output of the country by assuming thatdifferences in earnings
reflect differences in productivity. But collective efforts by various groups(such as doctors, manual
workers, teachers, and engineers through trade unions) and otherfactors may distort relative earnings in
the economy. Moreover, private rates of return cannot be evaluated where the costs of running the
school are negligible as is the case of a singleteacher school being run without any fee in many Indian
villages

Sixth,

returns from investment in creating skills and knowledge do not increase incomes of theindividuals
concerned but the total productive capacity of the economy.

Seventh,

according to Eckaus, prices of educated labour used in the estimation of rate of returnmust reflect the
relative scarcities of factors involved. But where the major part of investmentcosts on education are
borne by the government, prices of educated labour do not reflect scarcitiesof factor inputs determined
in competitive markets. Moreover, this criterion fails to provideinformation on “how much” and “what
kind” of additional education is required for economicdevelopment.

Last,

as observed by Bowen, the difficulties involved in identifying earnings differentials withproductivity

differentials force to be somewhat more cautious in drawing sweeping conclusionsas to the effects of
education on national output.

10

2. The Criterion of Contribution of Education to Gross National

Income.

According to thiscriterion, investment on education is determined by its contribution to increase in gross

nationalincome or physical capital formation over a period of time. Schultz analysed the contributionof
education to growth in national income in the US from 1900 to 1956. and came to the conclusionthat
the resources allocated to education rose about 6.5 times:

(a)

relative to consumer incomein dollars;

(b)

relative to the gross formation of physical capital in dollars. In other words, theincome elasticity of the
demand for education was about 3.5 times over the period, andalternatively, investment in education
contributed 3.5 times more to the increase in gross nationalincome than investment in physical capital.

11

Schultz has also calculated the total stock ofeducational capital at different points in time. He added
together the possible earned incomeforgone (or the opportunity cost) by those enrolled in schools,
colleges, and universities andthe expenditure for formal education of all types with allowance for
depreciation. The totalstock of educational capital in the labour force of the US rose from $ 63 billion in
1900 to $ 535 billion in 1957, and the ratio of the stock of educational capital to the stock of physical
capitalrose from 22 per cent in 1900 to 42 per cent in 1957.

12

Similar estimates have been made by P.R. Panchmukhi in India following Schultz’s method. Hisestimates
of educational capital reveal that the total cost of formal education in India rose fromRs 341 crores in
1950-51 to Rs 769 crores in 1959-60.

13

9. R.S. Eckaus, ‘Economic Criterion for Education and Training’,

RES,

May, 1964.10. W.G. Bowen,

Economic Aspects of Education,

1964.11. T.W. Schultz, ‘Capital Formation by Education.”

JPE,

December, 1960.12. T.W. Schultz,

Education and

Economic Growth in Social! Forces Influencing American Education,

N.B.Hentry (ed.) 1961.13. P.R. Panchmukhi, ‘Educational Capital in India.’

IJE,

January-March , 1965.

Its Evaluation.

These estimates are more realistic than the estimates of returns on education asthey measure the
impact of educational investments on the economy. They are based on theopportunity cost of education
which means foregone incomes of students while in schools,colleges and universities, and expenditure
incurred on formal education after making dueallowance for depreciation. But the calculation of
foregone incomes is not so simple and posesa number of problems. Are these to be estimated from the
present earnings of persons in thesame age group who never went to school? This is the case in
underdeveloped countries wherethe majority of young persons have no schooling but they earn in
family vocations. Thus thereal cost of education may be a consequence of foregone earnings while
attending the school.Moreover, there being widespread unemployment, wages as foregone earnings
cannot measurethe impact of educational investments on national income accurately. Under such
circumstances,the estimation of foregone earnings becomes arbitrary as the increased supply of labour
tendsto be lower than the actual earnings. Again, social costs are also an important factor. For, thecost
involved in having potential members of labour force to go to school rather than to work isnot only a
private cost to the students or their families but also a social cost; a potential additionto national
product remains unrealized. To Balogh

14

calculations made about the profitabilityof education are not merely fallacious in a technical economic
sense but immoral politically.

3. The Residual Factor Criterion.

Solow, Kendrick, Denison, Jorgenson and Griliches, Kuznets,

15

and other economists have tried to measure what proportion of the increase in the GNP, over aperiod of
time, could be attributed to the measurable inputs of capital and labour, and whatproportion of the
increase in the GNP could be ascribed to other factors, frequently grouped as‘residual’. The most
important of these residual factors are: education, research, training, theeconomies of scale and other
factors affecting human productivity. Denison’s estimates for theUnited States for 1929-57 reveal that
the contribution of education to the growth of total realnational income was 23 per cent. So far as the
contribution of the “residual” factor is concerned,it accounted for 31 per cent of total growth of national
income. This was due to the impact ofthe advance of knowledge (20 per cent) and the economies of
scale resulting from the growth ofnational markets (11 per cent). On the other hand, Solow in his study
of the United States forthe period 1909-49 attributed 90 per cent of the average growth rate of output
per head to the“residual factor,” falling under the general heading of technical change.

Its Criticism. The

residual factor criterion is not tree from certain weaknesses.

First,

the residual factor has been used as a much wider term which includes such varied factorsas the
economies of scale, technical change, besides education research and training. Thesefactors make the
criterion complex.

Second,

the residual factor may also include some improvements in capital assets which may, ofcourse, be
attributed to improvement in human knowledge and skills.

Third,

this criterion does not make any distinction between formal and informal education, orin the quality or
content of education.

Fourth,
 Jorgenson and Griliches in their study reveal that the “residual” which Denison attributesto ‘advance in
knowledge’ is small and not large. The fact that the residual is small indicatesthat the contribution of
investment to economic growth is largely compensated by the privatereturns to investment.

14. T. Balogh, ‘The Economics of Educational Planning,’

Comparative Education,

October 1964.15. R.M. Solow, ‘Technical Change and the Aggregate Production Function,”

R.E. & S.,

1957; J.W. Kendrick,

Productivity Trends in the United States,

1961; E.F. Denison,

The Sources of Economic Growth in the UnitedStates and the Alternatives Before US.

1962; D.W. Jorgenson and Z. Griliches, “The Explanation ofProductivity Change,”

R.E.S

, Vol. 34, 1967; S. Kuznets,

Modern Economic Growth,

1966.

Human Capital Formation and Manpower431

Fifth,

in their study of the U.S. economy for 1945-65, Jorgenson and Griliches find virtually no“residual” to
explain after making corrections for aggregation errors for capital, labour, prices,etc. After making
adjustments for such errors, the contribution of residual is reduced to 0.1 percent per year.

Sixth,

the “residual” criterion is based on the production function which is characterised byconstant returns to
scale. In reality, a developed economy is subject to increasing returns. As aresult, more of the growth of
output would be credited to the increase of physical inputs andless to the increase in the “residual
factor.” It but not the least, capital’s contribution to economicgrowth has been underestimated in the
residual criterion. If the resource put into the advancein knowledge were counted as investment and the
capital stock were so defined as to includethis type of investment, more of the growth rate would be
attributed to increase of the capitalstock and less would be left in the residuary category of increases in
knowledge, skills, training,etc. Thus the residual criterion has not received enough support from
economists.
4. The Composite Index Criterion.

Harbison and Myers

16

have developed a composite indexcriterion of human resource development on the basis of certain
human resource indicators.The composite index is used as the basis for ranking seventy five countries
and grouping theminto four levels of human resource development, namely, underdeveloped, partially
developed,semi-advanced and advanced. Then they have attempted to study the relationships
betweenthese indicators and indicators of economic development.They have described the following
indicators of human resource development: (1) Number offirst and second level teachers per 10,000
population. (2) Engineers and scientists per 10,000population. (3) Physicians and dentists per 10,000
population. (4) Pupils enrolled at first(primary) level of education as a percentage of the estimated
population aged 5 to 14 inclusive.(5) The adjusted school enrollment ratios for first and second levels
combined. (6) Pupils enrolledat second (secondary) level of education as a percentage of the estimated
population aged 15 to19 inclusive, adjusted for length of schooling. (7) Enrollment in third (higher) level
of educationas a percentage of the age group 20 to 24. (8) The percentage of students enrolled in
scientificand technical faculties in a recent year. (9) The percentage of students enrolled in faculties
ofhumanities, fine arts, and law in the same year.The first three indicators are partial measures of the
stock of human resources and the next fourare measures of additions to the stock.After a number of
trials with some of the indicators, Harbison and Myers have developed acomposite index to rank
seventy five countries according to four levels of human resourcedevelopment. The composite index is
simply the arithmetic total of (1) enrollment at secondlevel of education as a percentage of the age
group 15 to 19, adjusted for length of schooling,and (2) enrollment at the third level of education as a
percentage of the age group, multiplied by a weight of 5. In their opinion, higher education should be
weighted more heavily thansecond-level in such an index.For statistical analysis, they take indicators of
economic development: (1) GNP per capita in USdollars, and (2) the percentage of the active population
engaged in agricultural occupations.Besides, they have used two more indicators: (

) public expenditure on education as a percentageof national income, and

(b)

the percentage of the total population in the age group 5 to 14,inclusive.

Harbison and Myer’s

study shows a close association between enrollment ratios at all levels of

16. Op. cit., Chapters 3-7.

432The Economics of Development and Planning

education and GNP per capita. The highest correlation coefficient (0.888) is found betweenGNP per
capita in US dollars and the composite index of human resource development whichis a combination of
second-level and third-level enrollment ratios.

Its Criticism.

The composite index is a useful criterion to measure the role of different levels ofeducation in
formulating an education policy geared to the economic development of LDCs. Itexpresses quantitative
relationships between indicators of human resource development andindicators of economic
development. But these relationships do not establish qualitativerelationships. Further, the composite
index does not reflect the influence of other factors suchas rich natural resources or less population
level which may lead to higher GNP per capita.

Conclusion.

Whatever the difficulties associated with the problem of investment in humancapital, it is now fully
recognised that the growth of LDC is held back not by the shortage ofphysical capital as by the shortage
of critical skills and knowledge which in turn limit thecapacity of the economy to absorb the available
physical capital stock. Thus human capitalformation is regarded even more important than material
capital formation.

MANPOWER PLANNING IN LDCS

Manpower planning relates to the long-range development of semiskilled and skilled

manpowerrequirements of the economy, and to plan educational priorities and investments in
humanresource development so as to enlarge employment opportunities in future.The general
approach to manpower planning in LDCs is three-fold:

first,

to identify the skilledmanpower shortage in each sector of the economy and reasons thereof;

second,

to identify themanpower surpluses in both the modernising and traditional sectors and the reasons for
suchsurpluses; and

third,

to lay down a strategy for manpower planning.We will discuss these aspects of manpower planning as
under:

MANPOWER SHORTAGE

The manpower shortage in LDCs fall into several categories:

1. Current Shortage.

There is a shortage of

highly educated
professional manpower in all LDCs.Such manpower includes scientists, engineers, doctors, agronomists
and veterinarions. Theylive in cities and do not like to move to rural areas where their services are
needed the most.Thus their shortage is increased by their relative immobility.The shortage of

sub-professional

manpower is even more acute than the professional manpower.Such manpower includes civil,
mechanical, electrical, chemical, metallurgical and agriculturaltechnicians; foremen, spinning, weaving
and finishing masters; nurses, compounders, midwivesand health assistants, etc. Some of the reasons
for their shortage are: (

) the failure to recogniseon the part of LDCs that the requirements for such sub-professional manpower
are many timeshigher than for professional personnel;

(b)

the few persons who are qualified to enter a technicalinstitute prefer to enter a university because the
holder of a university degree has a higherstatus and pay; and (

) the seats available in the technical institutes are very few as compared tothe universities.Shortage also
exist at the

top-level managerial and administrative personnel

in both the private andpublic sectors. Such shortage exist in respect of general managers, production
managers, salesmanagers, works managers, cost accountants and company secretaries. There is also the
shortageof persons with entrepreneurial abilities.There are shortage of trained primary, secondary and
craft

teachers

and

instructors

because of

Human Capital Formation and Manpower433

their low salaries. They tend to leave the technical profession as and when they find moreattractive jobs
in other profession. The shortage of science and mathematics teachers isparticularly acute in secondary
schools.At the skilled workers level, there is shortage of

craftsmen and technical clerical personnel.

In theformer category are included tool-makers, fitters, machine-tool operators, welders,
moulders,electricians, blacksmiths, painters, motor mechanics, etc. The shortage of technical
clericalpersonnel relate to typists, stenographers, bookkeepers, and business machine
operators.Besides, there is a dearth of several

miscellaneous categories

of personnel in LDCs, such as,accountants, staticians, economists, radio and television specialists, and
airplane pilots.

2. Invisible Shortage.

There is invisible manpower shortage in the form of unfulfilled jobs inLDCs, despite widespread
unemployment and under employment. In the majority ofestablishments persons with the requisite
skills are not available. As a result, a number of postsremain vacant. But to carry out such jobs, the
concerned establishments employ persons notpossessing the required education and training for such
jobs. This affects adversely productivityand production of such establishments.

3. Frictional Shortages.

The LDCs also experience frictional manpower shortages due to lackof an organised employment
market, increase in the sudden demand for manpower in labourshortage regions, and immobility of
labour. For example, agricultural transformation andurbanisation has created such shortage in Punjab.

4. Replacement of Foreign Personnel.

There are current manpower shortage of highly skilledmanpower at the top level in the LDCs of Africa
and the Gulf countries due to replacement offoreign personnel. “The strategic technical positions in the
public services, the top positions inprivate industry and commerce, and most of the higher positions in
education are of necessity,held by non-indigenous personnel.” With the gradual withdrawal of foreign
personnel in thewake of nationalisation, manpower shortages are likely to increase further in the oil
refineries,the mines; the plantations, the big commercial establishments, the factories, the banks,
theuniversities, the hospitals, ‘the power plants, etc. in such countries.

MANPOWER SURPLUS

Manpower surplus relate to both unskilled and skilled workers available for and in search ofgainful
employment. The manpower surplus in LDCs consist of the following categories:

1. The Underemployed

include both open and disguised unemployed. Open underemployedare those who are working less
than the normal hours. Disguised unemployed are those whosecontribution to output is less than what
they can produce by working for normal hours of workper day. Both these forms of underemployment
exist in rural and urban areas in the LDCs. Inrural areas the underemployed include the landless
agricultural workers, marginal farmers,peasants, artisans, craftsmen and self-employed persons. They
are the result of backwardagricultural methods and feudal systems of land tenure. In urban areas, they
include hawkers,petty traders, workers in service and repair shops, porters, shoeshine, etc. who are not
qualifiedfor medium and higher skilled jobs.The unemployment estimates under this category are
available only on the basis of NSS Roundsin a number of developing countries like India. They are based
on usual status, weekly statusand daily status which bring out the chronic, seasonal and part time
unemployment and underemployment respectively. The weekly and daily status represent the average
numbers of personsunemployed per week and per day respectively during the survey period. On these
basis, some

434The Economics of Development and Planning

economists estimate the number of underemployed to be as high as 50 to 80 per cent of thepotential

labour force in the LDCs.

2. The Educated Unemployed and Underemployed

also reflect the surplus manpower in LDCs.The educated manpower refers to those persons who have
obtained at least a matric/secondarycertificate. In the LDCs, the demand for education is high because
the private cost of educationis low and a higher level of education is associated with better job
opportunities, higher level ofincome and better status. Since technical education is relatively costly and
restricted, morepersons in the younger group are attracted towards higher education in colleges and
universities.But with their formal education they are neither able to get jobs nor are fit for self-
employment.Structural rigidities and slow rate of growth have failed to increase job opportunities for
them.Consequently, the educated manpower has been on the increase. Further, there
isunderemployment among the educated who take up jobs below the skill levels they haveobtained
through education and training,

3. Urban Unemployed and Underemployed.

Besides the surplus educated and uneducatedmanpower already existing in urban and rural areas of
LDCs, urban unemployed andunderemployed are on the increase with development. The rapid increase
in population, overcrowding on the land, the seasonal nature of agricultural operations, the spread of
education inrural areas and the building of roads and the establishment of new industries in urban areas
areencouraging migration of people to towns and cities. But the industrial sector has failed toabsorb the
growth of labour force thereby increasing urban unemployment andunderemployment.

STRATEGY FOR MANPOWER PLANNING

17

Harbison points toward a three-pronged strategy for human resource development to overcomethe
manpower shortage and surpluses in LDCs. The essential components of such a strategyare: (1) the
building of appropriate incentives; (2) the effective training of employed manpower,and (3) the national
development of formal education. These three elements of manpowerstrategy are interdependent and
progress in one is dependent upon progress in the other two.Therefore, LDCs should plan an integrated
attack on all three fronts simultaneously.

1. Building of Incentives.

In the LDCs, people should be encouraged to engage in suchproductive activities which are needed to
accelerate the process of economic development.Since all skills are critically scarce, scientists,
engineers, doctors, managerial and administrativepersonnel, etc. should be encouraged and given due
status. In the majority of LDCs duerecognition in the form of good salary and high social status is not
given to persons possessingsuch critical skills. Often political pressures, caste, creed and regionalism
result in a tragic wasteof precious talent, low morale and undermining of efficiency. Some of the more
ambitious,having resources migrate to the advanced countries for better opportunities. To avoid the
braindrain, the LDCs should build appropriate incentives within the country. This equally applies
toteachers, techinicians, nurses, agronomists and other semi-professional groups.“The building of
incentives is crucial for both the accumulation and investment of human capital.In fact, investments in
education may be wasted unless men and women have the will to preparefor and engage in those
activities which are needed for accelerated growth.” Moreover, themarket mechanism should be made
more effective for the optimum allocation of manpower.

2. Training of Employed Manpower.

The second important plank for the strategy of human

17. This also relates to the

Strategy for Human Resource Development.

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436The Economics of Development and Planning

Since higher education is costly, emphasis should be on low-cost buildings, utilising fully theexisting
plant and equipment, and other economy measures without lowering standards.Another element in the
strategy for formal education is

adult education.

The programme offormal adult education should include “agricultural and co operative extension
work,fundamental education and other organised programmes to enable men and women toparticipate
more effectively in their country’s economic development.” Investment on adulteducation is time-saving
and cost-reducing and provides more lucrative returns than any otherkind of educational investment.

Conclusion.
The three elements of human resource development discussed above should formpart of a country’s
development programme. To solve the problem of surplus manpower requirescheck over rapidly
increasing population, removal of market imperfections to improve labourmobility, building of
appropriate incentives, creation of critical skills among the employed,and the unemployed through
formal education. Above all, “successful development requiresthe building of effective government
organisations, private enterprises, agricultural extensionforces, research institutions, producer and
consumer co-operatives, education systems, and ahost of other institutions which mobilise and direct
human energy into useful channels.”

ESTIMATING FUTURE MANPOWER REQUIREMENTS*

The estimation of future manpower requirements is the most difficult task for planners andpolicy
makers. At the same time, it is an indispensable step in planning for future manpowerrequirements of
the economy, for building of educational and training institutions and to estimatethe costs involved
therein. Since the development of manpower is a long-term process, thecountry’s requirements must be
estimated for one or two decades in advance. This is because ittakes a very long time “to build schools,
to train teachers, and to fill the educational pipe linesin primary and secondary schools in order to
expand the number of university graduates.”There are a number of methods to estimate future
manpower requirements but we will discussa few important ones here.

1. Manpower Requirements Approach. Backerman

and

Parnes

have developed. “Themanpower requirements approach to educational planning.” They attempt to

define educationalneeds in terms of productivity and a given pattern of economic growth. This method
involvesthe following steps:(

) The analysis of the existing manpower structure is made by (

) preparing an inventory ofemployment and short-term requirements for manpower for each major
sector of theeconomy; (

ii

) a general appraisal of the educational system; (

iii

) a survey of programmes for onthe job training; and (

iv

) an analysis of the structure of incentives and proper utilisation ofpresent manpower.(

b
) On the basis of an economic plan, the patterns of output for the various sectors of economyare
projected for the forecast year. Then total employment for each sector and the economy isestimated on
the basis of some assumptions about productivity.

(c)

The total employment for the forecast year is allocated among the various occupations foreach sector
according to occupational classification system chosen. Then the requirements foreach occupational
category are aggregated from the various sectors to arrive at the totalmanpower-stocks required in the
forecast year. In these estimates, allowance is made for the

*This section draws heavily on F. Harbison and C.A. Myers,

Op. cit.

Human Capital Formation and Manpower437

effects of increase in productivity on the occupational structure.(

) The supply of manpower with each minor type of educational qualification is estimated forthe forecast
year on the basis of present stocks of manpower, anticipated outflows from theexisting educational
system as presently planned, and allowances for losses due to death,retirement, and other reasons for
withdrawal from the labour force.(

) The estimated output on manpower from the educational system are compared with therequired
manpower outputs as determined in the above step

(d).(f)

The orders of magnitude for expansion of the educational system are then established toclose the gap
between anticipated manpower requirements and presently expected manpowersupply.This method
has been used with slight modifications by Turkey, Greece, Yugoslavia, Italy, Spainand Portugal. It links
manpower requirements to productivity and is designed to identifymanpower difficulties which could
hamper production.

Its Weaknesses.

But this approach has certain weaknesses. The productivity criterion is not souseful in estimating
manpower requirements in agriculture where it is not possible to estimatefuture employment by
forecasting about productivity in especially in countries having massivedisguised unemployment. The
LDCs “lack empirical data on which to base estimates of expectedincrease in productivity and the
bearing of these on changes in occupational requirements.”Another difficulty relates to “the
determination of required educational qualifications of high-level occupations for the forecast year. To a
large extent, they may depend upon the supplystructure of educated persons at that time.”

Lastly

, this approach gives an impression of makingforecasts about a future situation. But due to complexity
of economic, social and political eventsin LDCs such predictions are dangerous. Thus the future
manpower requirements approach based on productivity analysis is arbitrary.

2. Tinbergen-Correa Model.

Jan Tinbergen and H. Correa in their study “

Quantitative Adaptationof Education to Accelerated Growth

” have build an input-output type model for estimating futuremanpower and educational needs. They
attempt to relate directly needed secondary and highereducational outputs to given rates of economic
growth, without using the intermediate step ofcalculating occupational requirements. Essentially,, the
number of persons required from eacheducational level is calculated from a series of linear equations
which relate the stock of personscompleting a given level of education and the number of students’ in
each level to the aggregatedvolume of production. Its purpose is to suggest what structure of the
educational system isneeded in order to let the economy grow at a certain rate, and how that structure
should changewith changes in the growth rate.The model is based on certain implicit assumptions: (

) education precedes other factors in theproduction process due to the long time involved in it;

(b)

there is a fixed coefficient betweenthe number of persons with secondary and higher education levels
and the volume of productionin the economy; (

) The number of persons with secondary and higher education is the correctnumber for the existing level
of aggregated output;

(d)

graduates of the educational system arefully-employed; (

) the teacher-student ratio is fixed over-time;

(f)

labour is substitutable atparticular level of education; and

(g)

technology and productivity remain constant.

Its Criticism.

The Tinbergen-Correa model provides a useful and convenient tool for estimatingthe educational
requirements for economic growth. But it has been criticised due to its implictassumptions:

First,

economists have questioned the assumption of fixed coefficients between the number ofpersons with
secondary and higher education levels and the volume of production. This

438The Economics of Development and Planning

assumption is based on judgement rather than on reality. It may be applicable to advancedcountries but
not to LDCs. Further, economic growth implies a faster increase in the volume ofproduction than of
manpower. Therefore, the assumption of fixed coefficients breaks down.

Second,

Balogh regards the model as simply a quantitative approach to education for he did notfind a stable
relation between the aggregate output and education. He opines that increasingthe conventional
education of the western type in LDCs might even reduce output and retardgrowth.

Third,

the

assumption that the student-teacher ratio is fixed overtime is based on the experienceof developed
countries and does not hold in the case of LDCs.

Fourth,

the assumption that the number of persons with secondary and higher education is thecorrect number
for the existing level of aggregate output is untenable because there are usuallyacute shortages or large
surpluses in LDCs.

Fifth,

the assumption that technology and productivity remain constant in the time periodcompletely ignores
their effects on required occupations and educational qualifications.

Lastly,

the Tinbergen-Correa model makes “no distinction between technical or academiceducation, makes no
allowance for qualitative imbalances in school curricula, and fails todistinguish between the major
economic sectors of the economy.”

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