Human Capital Accumulation in OIC Member Countries
Date : 12 September 2011

Human capital refers to the knowledge and capabilities embodied in people that can be utilized to advance the production techniques and contribute to the social and economic development. The term “human capital” is used because people cannot be separated from their knowledge or skills in the way they can be separated from their financial and tangible assets. Along with physical capital stock, human capital stock is one of the factors of production in determining the economic prosperity and progression, with the stock of human capital playing an important role in determining the ability to absorb new knowledge and technologies, and thus increasing labour productivity. Productivity growth in turn is a key factor in promoting long-term economic growth. The role of education in increasing the productivity and efficiency of labour force by increasing the cognitive stock of economically productive human capability is well acknowledged.

Theoretical models of human capital and growth are built around the hypothesis that knowledge and skills embodied in humans directly raise productivity and increase an economy’s ability to develop and to adopt new technologies. Empirical literature also provides strong evidence on the impacts of higher educational inputs on productivity and growth. A survey of the empirical results conducted by Sianesi and Van Reenen (2000) shows that an overall 1 % increase in school enrolment rates leads to an increase in GDP per capita growth of between 1% and 3 %. An additional year of secondary education leads to more than a 1 % increase in economic growth each year. At the microeconomic level, there is clear evidence that human capital and productivity are strongly related. Human capital accumulated through on-the-job-training (OTJT), especially for workers with low qualifications, increases productivity at the firm level. OTJT is also a direct source of innovation for firms that strengthen their long-term competitiveness (Blundell et al., 1999).

Measuring the stock of human capital is, however, challenging. In the literature, various proxies are used in analysing the human capital developments. School attainment has been the most common but also the easiest way of measuring human capital. Economic growth literature suggests alternative ways to construct such a dataset. In this outlook report, when constructing the dataset on human capital stock, a methodology will be adopted that is commonly used in growth literature, including the seminal work of Hall and Jones (1999). A detailed description of the methodology can be found in the technical appendix. According to this approach, human capital is calculated by using two major indicators, the total number of labour force and average schooling. Therefore, under given average schooling level, the countries with higher labour force will have higher human capital stock. Equivalently, under given size of labour force, countries with higher educational attainment will have higher human capital stock. A disadvantage of this index is that it is not able to capture the investments in human capital after individuals complete their formal schooling, which is in fact hardly measurable. Therefore, though human capital accumulation cannot be restricted to formal education only, due to lack of alternative measurement approaches that can take into account the other skill and capacity building efforts, the above mentioned methodology of growth literature will be adopted.

Noting these measurement issues, the analysis on human capital accumulation in OIC countries reveal that, starting with low levels of human capital stocks, the member countries have significantly increased their stocks of human capital over the last four decades, but this did not translate into higher economic growth in all countries. This fact leads to questioning of the quality of education provided to their citizens by these countries. Additionally, the report evaluates the relationship between human capital, education and productivity. Moreover, it assesses the linkages between social indicators of development and schooling and productivity. This report finally provides detailed discussions on trends and prospects in human capital developments in the OIC Member Countries.

Online Electronic Version

Human Capital Accumulation in OIC Member Countries (English)