Trends and problems of human capital formation

T he term, ‘human capital formation’ refers to the process of acquiring and increasing the number of persons who have the skills, education and experience which are critical for the economic and political development of the country. Human capital formation is thus associated with investment in man and his development as a creative and productive resource.

According to Schultz there are five ways of developing human resources: Health facilities and services broadly concerned to include all expenditure, that affect the life expectancy, strength and stamina and the vigour and vitality of people

On the job training, including the old type of apprenticeship organised by the firm

Formerly organised education at the elementary, secondary and higher level

Other programmes for adults that are not organised by the firm Migration of individuals and families to adjust to changing job opportunities Investment in human capital means expenditure on health, education and social services in general and in its narrow sense. It implies expenditure on education and training. It has become conventional to talk about investment in human resource in its narrow sense, because expenditure in education and training is a capable measurement compared to the expenditure on social services.

Importance

The notion of investment in human capital is of recent origin. In the process of economic growth, it is customary to attach more impor- tance to the accumulation of physical capital. Now, it is increasingly recognized that growth of tangible capital stock depends on the considerable extend on human capital formation, which is the process of increasing knowledge, the skills and the capacities of people of the country.

Shultz, Harbinton, Dension, Kendrick, Mosest, Mary Bowman Kuznets and a host of other economists reveal that one of the important factors responsible for the rapid growth of the American economy has been the relatively increasing outlays on education. They reveal through the study that a dollar invested on education brings a greater increase of national income than a dollar spent on dams, roads, factories or other tangible capital goods.

Economists are therefore of the view that it is the lack of investment in human capital that has been responsible for the slow growth of the underdeveloped countries. Unless, such economies spread education knowledge and know-how and raise the level of skills and physical efficiency of the people, the productivity of physical capital is reduced.

Underdeveloped, developing countries are faced with two diverse man power problems. They lack the critical skills needed for the industrial sector and have a surplus labour force. The existence of surplus labour is to a considerable extent due to the shortage of critical skills. So, these diverse problems are interrelated. Human capital formation aims at solving these problems by creating the necessary skills in man as a productive resource and providing him gainful employment.

Physical capital becomes more productive if the country possesses sufficient human capital. Most under developing countries are strongly committed to programmes of constructing roads, dams, power houses, factories pertaining to light and heavy industries. For this, they need engineers, managerial and administrative personnel, scientists, doctors, veterinarians, agronomist, accountants etc. If there is a dearth of these varied type of human capita, physical capital cannot be productively utilized.

Moreover, under developing countries import physical capital for development but they are unable to utilize it fully due to lack of critical skills required for its operation. Technical skills and know-how usually come with foreign capital. Therefore, the failure of human capital to grow at the rate of physical capital has been responsible for the low absorptive capacity of the latter in the under developing countries. Hence, the need for investment in human capital is of paramount importance in such countries.

Underdeveloped counties are characterized by economic backwardness which manifests itself in a low labour efficiency factor. This limits specialization in occupations and in trade, a deficient supply of entrepreneurship and too many values and traditional social institutions that minimize the incentives for economic change. It is necessary to increase the knowledge and skills of the people to remove the economic backwardness and instill their capacities and motivations to progress. In fact, without an improvement in the quality of the human factor, no progress is possible in an under developed country.

According to Professor Ajit Dasgupta, the theory of optimum investment deals with the allocation of overtime resources allocated to education to help to increase the productive capacity, and thereby raise output and consumption in future. Choices relating to education or other types of social infrastructure are therefore an essential part of the theory of investment.

Problems

The concept of human capital formation in the context of investment in education possesses a number of problems. How much is the total stock of human capital required? It is difficult to assess the total stock of human capital required in a country. The growth of Western European and United States of America has been based more on investment in physical capital than in human capital in their earlier phase of development.

It is not possible to spell out in concrete terms the growth rate of human capital formation as is commonly the case with physical capital accumulation. However, it can be said in general terms that the rate of accumulation of human capital should exceed not only the growth rate of labour force but also the growth rate of economy.

According to Harbinson, in most countries, the rate of increase in scientific and engineering personnel should be at least three times that of the labour force. But there is no empirical evidence to prove the different growth rates of human capital needed by under-developed countries at the various stages of development.

Almost all the underdeveloped countries in Asia, Africa and Latin America give a high priority to primary education which is often free and compulsory. But, it leads to considerable wastage and stagnation and puts a severe strain on the physical facilities for teaching staff of educational institutions.

The above countries in their enthusiasm to spread higher education have been opening too many universities without trying to improve the quality and the standard of education. This tends to lower efficiency of undergraduates and graduates employed both in the private and public sector and do not promise well for the formulation of dynamic leadership and economic development. This leads to the wastage of human resources.

Moreover, insufficient attention has been paid to agricultural education, adult education and on-the-job training programmes in these countries. There are no on-the-job training programmes and little is done in the field of adult education also. These tend to help in changing the outlook of the farmers, sharpen their decision-making skills and provide them necessary information with regard to modern agricultural practices.

Harbinson reveals that investment in education to be more effective for rapid growth, adequate incentives should be provided to men and women to engage in this kind of productive activities, while we needed to accelerate the modernization process.

The major problems in human capital formulation in developing countries are: Rapidly growing population Mounting unemployment in the modern sector of the economy as well as widespread underemployment in traditional agriculture Shortage of persons with the critical skills and knowledge required for effective national development Inadequate or underdeveloped organisations and institutions for mobilizing human effort Lack of incentives for people to engage in particular activities which are vitally important for national development