Journal of International Academic Research (2011) Vol.11, No.1.

30 April 2011

Relationship between Education and Economic Growth in Pakistan: A time series analysis.
Zaheer Khan Kakar, M.Phil Fellow, Department of Economics, National University of Modern Languages(NUML), Islamabad. Dr Bashir Ahmad Khilji, Head Department of Economics, National University of Modern Languages (NUML), Islamabad. Muhammad Jawad Khan, Lecturer, Department of Economics, Balochistan University of Information Technology, Engineering & Management Sciences (BUITEMS), Quetta. Abstract
Education is one very important factor of human capital formation. The objective of this paper is to examine the long-run relation between education expenditures and economic growth in Pakistan. Time series data is used for the period 1980-2009 for analysis and cointegration and error correction models are used to determine the long and short run relationship of education and economic growth. In this study, an attempt is made to determine and analyse the educational trends policy, trends of education, and challenges and it role in economic development in Pakistan. The study also presents policy measures for education sector for human capital formation and escalates economic growth in Pakistan.

Keywords
Pakistan, human capital, education, Economic Growth. Time series, co-integration, error correction.

1.

Introduction

Education is universally acknowledged a primary tool to promote economic development. It plays a fundamental part in developing human capital and escalates economic growth by improving skills, increasing competency, and productivity. The education brings benefits for the whole society and the individuals. For developing country like Pakistan, education plays a key role in poverty reduction, and removing both social and income inequalities. This study focuses on the question that, "whether improvement in education sector brings improvement in economic growth in Pakistan. Generally, it can be said that education does effect the economic development because it is considered as one major factor of improving human capital. Practically, there is difference among researchers as to whether the education have positive or negative relation with economic growth, or in some cases the studies indicates no impart of education expenditure on economic growth. Barro (1991) finds a positive relationship between education expenditures and economic growth. De Meulmester and Rochet (1995) concludes that the relationship is not always positive between education and economic growth. Benhabib and Spiegel, (1994) acknowledge the human capital development as a source of economic growth.

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Gemmell (1996) determine that, both human capital and their growth rates as main determinants of economic growth. Rodriguez and Rodrik (1999) point out that normally the instruments used to determine the relationship are not suitable. According to Bils and Klenow, (2000), "Countries having high rate of enrollment in schools made faster growth in per capita income because high enrollment rate causes rapid improvement in productivity". Hanushek and Kimko (2000) show that quality of education have a remarkable impact on productivity and national growth rates. Education can play its role in economic growth and benefit the society and individual as well. For individual education increases employment opportunities and higher income and improved life quality. The objective of this study is to determine the relationship between education expenditure and economic growth in Pakistan.

2.

Education Sector in Pakistan

Education is the key issue to improve living standards and to reduce social and income inequality. Different Governments in Pakistan have taken numerous steps to improve the quality of education. According to the Education Statistics of 2008-9 Shows that literacy rate was high in urban areas (74%) then the rural areas (48%). Literacy rate in men are more the women's, as for men (69%) compared to women (45%). Province wise literacy rate indicates, "Literacy rate in Punjab is (59 %), Sindh, (59%), Khyber Pakhtunkhwa (50%) and Balochistan at (45%)". Total adult literacy rate show the figure of 57%. Pre Primary Education is a vital element of Early Childhood Education. An increase of 2.2% enrolment rate is estimated for the year 2009-2010. 156, 653 Primary Schools with 465,334 Teaching staff are functioning in Pakistan. An increase of 0.6 % in Primary enrolment (18.468 million) in 2009 compare to (18.360 million) in 2008. Statistics indicates that, 24,322 Secondary Schools with 439,316 Teaching staff are functioning in Pakistan. Moreover, the enrolment rate of 2.9 % (2.556 million) is observed in 2009-2010. The enrolment rate of (948,364) is observed in 2009-10 in Higher Education. Four new universities are formed to boost and promote the higher education in Pakistan. Currently a total number to 132 universities with 50,825 Teachers in both Private and Public Sectors are working in Pakistan. Pakistan is blessed with naturally talented individuals, but due to worse law and order, very low employment opportunities, and insufficient research activities, a number of professionals are leaving Pakistan for the sake of better career and life. To tackle this problem of brain drain, during last few years governments have taken numerous steps to promote research activities and improve the quality of facilities in education institutes. Many scholarships programmes have been offered throughout the year for higher education, including ingenious scholarship, special scholarship programme for the students of Fata and Balochistan. At present 3,237 students are studying in HEC recognised universities. HEC has sent about 2,600 students for studies abroad under different foreign scholarship programmes. In order to improve and promote research activities, 20 Research Laboratories have been established in major universities.

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3.

Methodology

3.1. Model The model used in this paper is based on the aggregate production function. Y = A.K. L. H (1) Y is output "A" is technological progress, "K" is capital stock, "L" is labour force, and "H" is used for Human capital. Human capital can be decomposed into two factors "L, E" where "E" is level of education. We can replace "H" with "E", and rewrite the equation as, Y = A.K. L. E (2) Equation (2) given above, is used to develop the econometric model to determine the impact of education expenditure on economic growth. The data used in this study is taken from different sources, including the World Development Indicators, state bank of Pakistan and economic survey of Pakistan (various issues). Natural logarithm has been taken for all variables. The variables used in this analysis include "Real GDP, gross fixed capital formation, Government expenditure on education as a percentage of GDP, labour force participation rate. In the empirical model "Y" represent "real GDP". "K" is used for "capital stock", "L" is used for labour force, and "E" is human capital measure. Real GDP is a measure of countries output or national income. And it can be defined as total market value of all the goods and services produced in a country during one financial year. Gross fixed capital formation is used as a measure of capital stock. Gross fixed capital formation or "GFCF" is a macroeconomic concept used as measure of the net investment in an economy in "fixed capital assets" during one financial year. Labour force is considered as the number of skilled workers willing to work. Labour force is one key factor in economic development of labour intensive countries. In the model, labour force participation rate is used as proxy for labour. Generally, Human capital refers to "skilled and efficient and productive labour force". Human capital is based upon two main factors "education and health". In the present study, our aim is to determine the impact of education on economic growth so we have used "government education expenditure as a percentage of GDP" as measure of human capital. First test of stationery is conducted to solve the problem of stationerity by using the unit root test. The Augmented Dickey-Fuller test has been used for this purpose. In order to determine the long run relationship johansen co-integration test has been employed. To combine the long-run dynamics with short run dynamics we used vector error correction model. All the variables are in log form and following model has been used for the analysis. LnY = + 1Ln(EDUEXP) + 2Ln(LFPR) + 3Ln(GFCF) + i List of Abbreviations: Ln = Natural Logarithm Y = Real GDP EDUEXP = government expenditure on education on education as % of GDP LFPR = labour force participation rate GFCF = gross fixed capital formation i = Error Correction Term

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4.

Results and Calculations

The time series data is used in this analysis, the ADF test is used for unit root problem in the variables. The ADF test is performed at level as well as first difference. The lag length is determined by using AIC and SICS criterions. The outcome of ADF given in Table-1, which show that not all the variables are stationery at level form but at first difference all the variables become stationery. This indicates that the variables are integrated of same order. To determine the long run relationship between the GDP growth and all demographic variables johansen co-integration test is used. The results of co-integration test, given in table-2. The lag length for the test is determined by "VAR" and The "FPE, AIC AND SC" criterion indicates the optimal lag length as "3". Table-2 presents the result of Johansen co-integration test. The trace test given in panel (a) of table-2 indicates 2 co-integrating equations and maximum eigenvalue given in panel (b) of table-2 indicate 1 co-integrating equations at 5% level of significance, which indicate that the model do possess a long run relationship.
Table-1: ADF Unit Root Test

Variables LNY LNEDUEXP LNGFCF LNLFPR

Level 0.574444 -2.134971 -1.102418 -0.322135

1st Difference Result -4.864370* -5.097708 -4.793458* -7.972794* I(1) I(1) I(1) I(1)

Source: researcher's calculations using E-views 5.0 NOTE: * indicates level of significant 5.

Table-2(a): Co-Integration Test :( Trace Statistics)

Hypothesised Trace 0.05 No. of CE(s) Eigenvalue Statistic Critical Value Prob.** None * 0.837542 82.15412 55.24578 0.0000 At most 1 * 0.541850 36.72078 35.01090 0.0325 At most 2 0.479375 17.20682 18.39771 0.0728 At most 3 0.034924 0.888706 3.841466 0.3458
Trace test indicates 2 co-integrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Source: researcher's calculations using E-views 5.0

Table-2(b): Co-Integration Test :( Maximum Eigenvalue) Hypothesised Max-Eigen 0.05 No. of CE(s) Eigenvalue Statistic Critical Value Prob.** None * 0.837542 45.43334 30.81507 0.0004 At most 1 0.541850 19.51396 24.25202 0.1873 At most 2 0.479375 16.31812 17.14769 0.0657 At most 3 0.034924 0.888706 3.841466 0.3458
Max-eigenvalue test indicates 1 co-integrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Source: researcher's calculations using E-views 5.0

The co-integration result indicates the presence of error correction model. Thus, the vector error correction model is tested. This indicates short run dynamics of the model. The error

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correction model combines the short- and long-term relations between analysed variables. The results of error correction model given in Table-3 confirm the co-integration results and indicate the presence of error correction term for "real GDP, gross fixed capital formation and labour force participation rate". "Error correction equation shows correct negative sign for "real GDP, labour force participation rate and gross fixed capital formation", the values for real GDP and labour force participation are highly significant. "-0.35" indicates that, about 35% of the previous disequilibrium has been removed in the present period for GDP growth rate. However, gross fixed capital formation show insignificant and education expenditure show no short run impact.
Table-3: Error Correction Model

Error Correction: CointEq1

D(LNRGDP) D(LNLFPR) D(LNGFCF) D(LNEDUGDP) -0.356091 -5.82E-05 -2.399615 1.78E-05 (0.08476) (4.0E-05) (3.32371) (2.2E-05) [-4.20116] [-1.47010] [-0.72197] [ 0.80749] -0.187994 (0.18045) [-1.04183] -0.362464 (0.17347) [-2.08949] -2453.305 (890.325) [-2.75552] -1773.542 (781.997) [-2.26796] -0.007759 (0.00886) [-0.87542] -0.025418 (0.00860) [-2.95402] -4195.337 (1389.77) [-3.01872] -1082.704 (1243.53) [-0.87067] 3973.641 (718.459) [ 5.53078] -2.35E-05 1.406734 (8.4E-05) (7.07587) [-0.27906] [ 0.19881] 0.000195 (8.1E-05) [ 2.41025] 1.718456 (6.80230) [ 0.25263] 3.12E-05 (4.7E-05) [ 0.66405] 5.17E-05 (4.5E-05) [ 1.14291] 0.120815 (0.23203) [ 0.52069] 0.100794 (0.20380) [ 0.49458] 4.80E-07 (2.3E-06) [ 0.20774] -1.26E-06 (2.2E-06) [-0.55990] 0.050242 (0.36219) [ 0.13872] 0.129356 (0.32408) [ 0.39915] -0.093518 (0.18724) [-0.49945]

D(LNRGDP(-1))

D(LNRGDP(-2))

D(LNLFPR(-1))

-0.759945 2298.043 (0.41598) (34912.4) [-1.82690] [ 0.06582] -0.166915 -13214.60 (0.36536) (30664.6) [-0.45685] [-0.43094] -3.64E-06 0.298314 (4.1E-06) (0.34755) [-0.87838] [ 0.85834] -5.26E-06 -0.657774 (4.0E-06) (0.33741) [-1.30865] [-1.94947] 0.101975 -52788.12 (0.64933) (54497.4) [ 0.15705] [-0.96863] -0.295080 -38426.69 (0.58100) (48762.8) [-0.50788] [-0.78803] 0.118065 42930.34 (0.33568) (28173.0) [ 0.35172] [ 1.52381]

D(LNLFPR(-2))

D(LNGFCF(-1))

D(LNGFCF(-2))

D(LNEDUGDP(1))

D(LNEDUGDP(2))

Source: researcher's calculations using E-views 5.0

5.

Conclusion
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Relationship between Education and Economic Growth in Pakistan: A time series analysis

Journal of International Academic Research (2011) Vol.11, No.1.

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This paper investigates the impact of government expenditure on education on economic growth on Pakistan for the period 1980-2009 by using co-integration and vector error correction techniques. The study also indicates capital stock and labour force participation in economic growth of the country as few key variables that seem to effect the economic development of Pakistan along with education in the long-run. The results confirm that education has a long run relationship of economic growth. Better standards of education improve the efficiency and productivity of labour force and effect the economic development in the long -run. However, in the short-run education do not have any significant relationship with economic growth. This implies therefore that "education quality is essential to increase the economic growth and human capital abilities for the country, the government with competent administration at the lower level, should increase the expenditure on education sector to promote research and development activities and improve the quality of education in order to improve the economy's growth performance.

6. References
Barro, R.J. (1991) Economic Growth in a Cross-section of Countries, Quarterly Journal of Economies, Vol.106, pp.407-443 Benhabib, J. and Speigel, M. (1994) the Role of Human Capital in Economic Development: Evidence from Aggregate Cross-Country Data, Journal of Monetary Economics, Vol.34, No.2, pp.143-173 Bils, M and Klenow (2000) Does Schooling Cause Growth?, American Economic Review, Vol.90, pp.1160-1183 De Meulmester, J.C. and Rochet, D (1995) A causality analysis of the link between higher education and economic development, Economics of Education Review, Vol.144, No.4, pp.351-361. Gemmell, N (1996) Evaluating the Impact of Human Capital Stocks and Accumulation on Economic Growth: Some New Evidence, Oxford Bulletin of Economics and Statistics, Vol.58, pp.9-28. Hanushek, E.A. and Kimko, D.D. (2000) Schooling, labour force quality, and the growth of nations, American Economic Review, Vol.90, No.5, pp.1184-1208. Ministry of Education. (2010) Statistical year book (2008-2009), Government of

Pakistan. Islamabad, Available from: <http://www.moe.gov.pk/Publications/20_march_yearbook.pdf> [accessed 29 March

2011]. Ministry of Finance (2010) Pakistan Economic Survey, Government of Pakistan, Islamabad, Available from: <http://www.finance.gov.pk.html> [accessed 29 March 2011] Rodriguez, F. and Rodrik, D (1999) Trade Policy and Economic Growth: a Skeptic Guide to the Cross-National Evidence, NBER Working Paper No.7081. State Bank of Pakistan (2010) Handbook of Statistics on Pakistan Economy 2010, Government of Pakistan. Islamabad, Available from: <http://www.sbp.gov.pk/departments/stats/PakEconomy_HandBook/index.htm> [accessed 29 March 2011].

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