Public spending on human capital formation and economic growth in Pakistan

Abstract

This present paper captures the growth effects of public physical and human capital investment, which highlights the relative efficacy of these types of investments on sectoral and aggregate output, employment and private investment, and indicates which sector of the economy of Pakistan is benefiting the most from these investments. It uses the production function approach based on the Mankiw, Romer and Weil (1992) growth models and applied the Fully Modified Ordinary Least Square (FM-OLS) technique using data from the Pakistan economy during the period 1964-2013. The results show that human capital investment in the public sector has a positive significant effect in all models. The coefficient indicates that a 1 per cent change in human capital investment will increase the output of the manufacturing sector by 0.44 per cent; the output of the services sector by 0.15 per cent; the output of agriculture sector by 0.094 per cent; and the aggregate output by 0.027 per cent. The public physical investment has the highest impact on manufacturing sector output (0.084 per cent) followed by aggregate output (0.034 per cent). The estimated elasticities indicate that at the sectoral level, public human capital investment has a greater output effect than the public physical investment, while at the aggregate level, the public-physicalinvestment effect dominates.