Factor accumulation and economic growth in Pakistan: incorporating human capital

The purpose of this paper is to examine the long-run and short-run relationship between factor accumulation (i.e. physical capital and human capital) and economic growth by calculating the stocks of human capital and real physical capital.

The study uses endogenous growth model, where GDP per worker is the dependent variable and factor accumulation (real physical capital per worker and human capital) is the explanatory variable under the autoregressive distributive lag framework from 1973 to 2014 for Pakistan.

The results suggest that there is a long-run relationship between factor accumulation and GDP per worker in Pakistan. Findings of the study are consistent with the endogenous growth model suggesting that accumulation of human capital increases labor productivity, employment level and per capita income, and causes economic growth.

Developing countries like Pakistan should increase share of human capital for economic development. Government should invest in the education sector because investment in human capital has a large potential of productivity growth and welfare increase in developing countries.

This study challenges the notion of human capital and real physical capital stock used by different researchers. Considering human capital as a core factor of production, a series of human capital as average year of schooling is calculated by utilizing the perpetual inventory method.