Human Capital and Economic Growth in Pakistan: A Cointegration and Causality Analysis

Abstract

This study is an attempt to investigate the role of human capital in terms of education and health on economic growth of Pakistan during 1974-2009. Using annual data, ADF, PP and Ng-Perron tests are utilized to check the stochastic properties of the variables. Long-run relationship among variables is confirmed through Johansen and Juselius cointegration test whereas the long-run and short-run dynamics are observed by VECM specification. For causality purpose both VECM based causality and Toda-Yamamoto causality tests are employed. Stability of the model is confirmed through CUSUM and CUSUMSQ. The results indicate strong positive impact of human capital on economic growth despite the fact that Pakistan has been spending less percentage of GDP on education and health facilities to create human capital. The study concludes that in order to reap maximum benefits from human capital there is a need to formulate and implement effective economic policies related to the provision of education and health facilities to the people.