Dividend or disaster?

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By Arsalan Khan

Investment in human capital has long been considered a major factor in creating a productive labour force and fuelling economic development. A country that invests in human capital witnesses more development as compared with the countries that don’t pay attention to human capital.

The question that arises is: is a large population is an asset or a liability for a country? The answer depends on various factors. For countries like Pakistan, Malthus’ population theory is valid. This theory states that an increase in population beyond a specific threshold becomes a liability for the nation. But this theory appears to be inaccurate when we consider the demographic transition of East Asian countries. A country’s population is simultaneously an asset as well as a liability. This depends on how we yield demographic dividends.

Our working age population can transform into productive and efficient human capital when it receives proper education and technical skills. This entirely depends on the willingness of the higher authorities to reap these demographic dividends. How do we achieve these dividends? Before answering this question, we must consider the reasons why some Asian countries (South Korea, Singapore and Malaysia) are more developed countries while others (Pakistan, India Bangladesh) are still lagging behind.

East Asian countries like South Korea, Singapore and Malaysia have shown tremendous achievements in terms of GDP per capita. South Korea has GDP per capita of $27,221 while the figure stands at $9,766 and $5,816 for Malaysia and Thailand (as per data from 2015). Meanwhile, South Asian countries have shown different trends that don’t even measure up to those witnessed in East Asian countries. Pakistan has a per capita GDP of $1,428 while the figure for India stands at $1,581. Bangladesh only has GDP per capita of $1,211.

Can these differences between economic indicators in both regions be attributed to the fact that East Asian economies are inherently better economies than South Asian economies? The answer is a resounding no.

When we consider of the economic indicators, both East and South Asian countries had similar economic conditions in the 1960s. Most countries in both regions had a GDP per capita of less than $200 – except for Malaysia, which had GDP per capita $340. While the per capita income has increased manifold in South Korea, Thailand and Malaysia, it has only increased by a smaller amount in Pakistan, Bangladesh and India.

A possible reason for these substantial differences between the two Asian regions is the difference between the productive capacity and efficiency of human capital, which is one of the most important factors of production. In the 1960s, the literacy rate of the Republic of Korea was 71 percent, Thailand’s stood at 61 percent and Malaysia’s was 53 percent. However, literacy rates in South Asian countries were much lower. The literacy rate in India was 28 percent while in Bangladesh and Pakistan, the level of literacy stood at 22 percent and 15 percent, respectively.

Five decades ago, there were differences between the human capital of East Asian countries and South Asian countries. Furthermore, the per capita expenditure on education shows the priorities of different countries in the 1960s. While Pakistan, India and Bangladesh were spending less than $1.5 on per capita education, the Republic of Korea, Malaysia and Thailand were spending more than $10 on per capita education. This shows the willingness of East Asian countries to educate their workforce which, in turn, leads to an efficient and productive human capital.

Recent data has revealed that the per capita expenditure on education in East Asian countries can no longer be compared with that of South Asian countries. Pakistan spends only $19.6 on per capita education, India spends $31.8 and Bangladesh spends $21.2. East Asian countries are far ahead in this regard. Republic of Korea spends $545 on per capita education while Malaysia and Thailand spend $493 and $161.

These statistics depicts a common strand: if we spend a vast amount of money on the education sector, the literacy rate will improve. This, in turn, increases the pool size of the productive and efficient population. Empirical evidence suggests that every successive year of schooling increases a person’s wage rate by 10 percent. So, if we pay due attention to our education sector, we will have a qualified labour force whose productivity will be far better than that of an uneducated labour force.

It is widely believed that educating a nation has two significant advantages. First, it enables people to earn more on the basis of their productivity. Second, it allows the household to save money because every educated individual of a particular household will earn a reasonable amount of money. Education, in turns, leads to a decrease in a country’s dependent population. With the decline in the ratio of the dependant population, there will be more saving. This will culminate in more investment, employment opportunities and economic growth.

Pakistan needs to focus on tertiary education. A growing emphasis on higher education will provide a suitable environment to convert a demographic transition into a dividend.

The writer heads the department of economics at the University of Swabi.

Email: arsalan@uoswabi.edu.pk