An Empirical Relationship Between Human Capital, Institutional Quality, and Economic Growth in Pakistan

Abstract

Pakistan is a developing economy where different policies have been adopted to increase economic growth, but the targeted growth rates have remained an elusive dream. Low quality of institutions and less attention towards the development of human capital are two major reasons for this failure. This study explores the association of institutional quality and human capital on economic growth in Pakistan from the time period between years 1984 to 2018. For the estimation of our model, Auto-Regressive Distributed Lag (ARDL) model has been used. The variance decomposition analysis is also used to check the shocks, direction, and magnitude of the shocks within the selected variables. Impulse response function confirms that the magnitude and direction of the shocks are positive. The outcome of this research suggests that accumulation in human capital increases productivity, and institutional quality helps to sustain economic growth. Therefore, policy makers should design such policies, which are helpful for the development of human capital. It is also recommended that law and order situation be improved so that the confidence of people and trust of investors is restored that eventually will drive economic growth in Pakistan.