Is government spending in the education and health sector necessary for human capital development?

The study addresses whether and how public spending on education and health, alongside social protection, contributes to human capital formation in Pakistan. Human capital—encompassing education, skills, and health—is a key driver of economic growth and development. Despite a large and young population, Pakistan has struggled with low investment in education and health, volatile spending patterns, and weak outcomes (e.g., low literacy and higher child mortality relative to regional peers). The research aims to quantify the effects of government education and health expenditure, current health expenditure, social protection, population growth, and FDI on multiple dimensions of human capital (educational attainment at primary, secondary, and tertiary levels; life expectancy; and child mortality), thereby informing policy on optimal allocation to build human capital.

Prior work emphasizes education’s central role in socio-economic progress, with extensive literature linking government education expenditure to economic growth. Evidence on government spending’s direct effect on human capital is mixed: some studies (e.g., Okafor et al., 2017) find insignificant effects on HDI in Nigeria, whereas others (Patel & Annapoorna, 2019; Edeme, 2019; Maharda & Aulia, 2020) report positive impacts of education and health spending on HDI in India and Indonesia. Literature on social protection focuses largely on resilience to shocks, with theoretical and descriptive evidence linking SP to building, protecting, and deploying human capital (Moroz, 2020; Béné et al., 2018; Hidrobo et al., 2018). In Pakistan, empirical work has mostly examined human capital’s effect on growth or determinants excluding public spending. This study fills gaps by empirically assessing government spending on education, health, and social protection as determinants of human capital formation.

Design and data: Time-series analysis for Pakistan using annual data (1971–2020) from the World Development Indicators/World Bank. Dependent variables (human capital measures): HC1 = educational attainment, at least completed primary; HC2 = at least completed lower secondary; HC3 = at least completed short-cycle tertiary; HC4 = life expectancy at birth (years); HC5 = infant/child mortality rate (per 1,000 live births). Independent variables: CHE (current health expenditure), DGHE (domestic government health expenditure), GEE (government education expenditure), SP (social protection), POP (population growth), FDI (net inflows, % of GDP). Analytic approach: - Stationarity: Augmented Dickey–Fuller (ADF) tests show mixed integration orders (most series I(1); some I(0): GEE, FDI, SP). - Cointegration: ARDL bounds testing (Pesaran et al., 2001) applied given mixed integration. Five separate ARDL models estimated to avoid multicollinearity across HC measures (HC1–HC5 each as the dependent variable). F-statistics (evidence of cointegration) across models exceeded critical bounds (e.g., Model 1 F=3.72; Model 2 F=4.76; Model 3 F=7.48; Model 4 F=11.92; Model 5 F=21.34; all > I1 bounds at conventional levels). - Estimation: ARDL cointegrating and long-run form with automatic lag selection. Reported both short-run differenced coefficients and long-run levels coefficients; included error-correction terms (ECM) to capture adjustment speed. - Diagnostics: No serial correlation (Breusch–Godfrey LM), no heteroskedasticity (Breusch–Pagan–Godfrey), correct functional form (Ramsey RESET), and model stability confirmed by CUSUM tests. Model equations: General ARDL and UECM specifications presented; specific ARDL forms included lags of dependent and independent variables for each human capital outcome (HC1–HC5).

• Education outcomes: • Primary attainment (HC1): CHE, DGHE, SP positively and significantly associated in both short and long run (e.g., short-run D(CHE) β≈2.73*, D(DGHE) β≈2.97*, D(SP) β≈2.41*; long run CHE β≈13.12*, DGHE β≈5.93*, SP β≈11.59*). POP negatively associated (short run β≈-8.44*, long run β≈-8.29*). FDI positive short run (β≈1.72*), insignificant long run. • Secondary attainment (HC2): CHE and DGHE positive and significant short run (β≈2.28*, 0.58*) and long run (CHE β≈2.71*, DGHE β≈1.47*). GEE shows a positive long-run association (β≈1.71, marginal). FDI positive short run (β≈0.81*), insignificant long run. • Tertiary (short-cycle) attainment (HC3): Short run: CHE, DGHE, SP, FDI all positive and significant (β≈4.82*, 2.49*, 1.66*, 2.90*). Long run: DGHE (β≈4.62*), GEE (β≈3.51*), SP (β≈7.11*) positive and significant. - Health outcomes: • Life expectancy (HC4): Short run: CHE, GEE, SP positive and significant (e.g., D(CHE) ≈0.01*, D(GEE) ≈0.20*, D(SP) ≈1.41*). Long run: CHE (β≈4.18*), DGHE (β≈4.43*), GEE (β≈2.13*), SP (β≈7.11*) positive and significant. • Child mortality (HC5): Short run: DGHE (β≈-0.22**), GEE (β≈-1.11*), SP (β≈-7.44*) significantly reduce mortality; CHE insignificant. Long run: CHE (β≈-5.18*), DGHE (β≈-3.43*), GEE (β≈-1.13*), SP (β≈-7.11*) reduce mortality. POP increases mortality in both short and long run (short run β≈7.23*, long run β≈6.04*). - Adjustment: ECM terms negative and significant across models (e.g., ≈-0.20*, -0.11*, -0.15*, -0.04*, -0.03*), indicating convergence to long-run equilibrium. - Diagnostics: No serial correlation or heteroskedasticity; functional form appropriate; CUSUM stability holds. Overall, public spending in health and education and social protection programs robustly enhance human capital (education attainment and longevity) and reduce child mortality; population growth strains primary attainment and increases child mortality; FDI supports educational human capital primarily in the short run.

The findings directly support the hypothesis that government spending on education and health is pivotal for building human capital in Pakistan. Increased CHE and DGHE translate into higher educational attainment (primary, secondary, tertiary), improved life expectancy, and lower child mortality, aligning with evidence that school and health investments improve outcomes. GEE strengthens tertiary attainment and health outcomes (life expectancy) and reduces child mortality, indicating benefits from education sector financing beyond schooling metrics. Social protection significantly bolsters educational attainment and life expectancy while reducing child mortality, consistent with theories that SP alleviates financial barriers to schooling and healthcare and protects human capital during shocks. Population growth’s negative effect on primary attainment and positive association with child mortality suggest capacity and resource constraints in education and health systems. FDI’s positive short-run effect on educational human capital suggests technology and knowledge spillovers; its longer-run insignificance for some education outcomes indicates complementary domestic investments (education/health/SP) are necessary for durable human capital gains. Overall, the results emphasize expansionary, targeted public investment in health, education, and SP to build and protect human capital.

Public expenditures on health (CHE, DGHE), education (GEE), and social protection (SP) are crucial for human capital development in Pakistan. They increase educational attainment at all levels and life expectancy and reduce child mortality, with robust short- and long-run effects depending on the outcome. Population growth undermines primary attainment and raises child mortality, while FDI primarily enhances educational attainment in the short run. Policy should prioritize sustained, objective-based increases in health, education, and SP budgets, strengthen delivery systems, and implement population management and FDI-enhancing strategies to maximize human capital formation. Future research could explore causal channels (e.g., quality of spending, targeting effectiveness), heterogeneity across regions, and interactions between FDI and public investment in shaping human capital.