Table of Contents

CONTENT

PAGE NUMBER

Human capital and economic growth in brief

Page 1

Economic growth with respect to human capital

development a board perspective

Page 1

Economic growth with respect to human capital

development Classical growth theory
Economic growth with respect to human capital
development Neo Classical growth models
Economic growth with respect to human capital
development Modern day approaches

Page 2

Page 2
Page 3

Defining productivity of human capital

Page 8

Significant examples of modern day practices on human

Capital development - Accenture

Page 9

Significant examples of modern day practices on

human Capital development - British multinational
telecommunications services company (BT)

Page 10

Significant examples of modern day practices on

human Capital development - National Rural
Support Program (NRSP)

Page 11

Significant examples of modern day practices on

human Capital development - Walmart

Page 12

Conclusive analysis

Page 13

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Human Capital Development and Economic Growth

Human capital and economic growth in brief:

In pure economic terminology, economic growth is defined as production at full
employment, meaning that growth of the economy that occurs in an environment which
acts as the maximum potential for production demonstrates economic growth. The
aggregate demand of an economy and the observed output within an economy are the two
factors that act as the major cause to economic development of a nation. The gross
domestic product (GDP) is a clear indicator of annual economic growth of a nation.
There is no organization or business that has zero involvement from human capital.
Technology has decreased the need for human capital to a great degree but technology
without human control cannot live on its own. This is particularly why human capital has
and always will be the deciding factor in the performance of just about everything.
It is generally believed that human capital development is based upon three key factors,
which include education, learning that comes by practically doing something
(experience) and training. Economic growth is also something that is directly linked to
human capital development because human capital plays a major role in contribution
towards economic development. So if an organization invests and makes use of its human
capital in the right manner then subsequently it will have economic growth on its part,
which will automatically contribute to the economic growth of the country in which that
particular organization is operating in.
So if an organization's human capital is performing well then that organization would
resultantly excel in economic terms and consequently this would also contribute to the
economic growth of the nation they are operating in.

Economic growth with respect to human capital development:

-

A broad perspective:

Development methods regarding human capital development differ from organization to

organization and from organizational level to national level. At national level, education
via schooling and other intuitions is relied upon for human capital growth. On the other
hand, organizations that make use of human capital which comes out from various

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education institutes, use regimes, practical work, training and several other innovative
methods to improve their human capital. These organizations that utilize the human
capital which comes out of educational institutes also use education to further refine the
human capital at hand.
So it goes without saying that educated labor force would always bring better results.

Classical growth theory:

The theory says that if productive capacity follows growth on it own and increment in
terms of quality as well as number in capital to allow for that particular capacity of
growth in productive capacity is the wealth of nations. The theory emphasized on the
importance of agriculture and aspects that are related to it, which includes labor among
several other factors. Classical economists also viewed urban industrialization as
unproductive, fruitless and infertile.
David Ricardo rightly argued on trading at that point of time, saying that trade can offers
numerous benefits to a country because a nation can buy goods or recruit relevant labor
force for that matter in cheap terms which would subsequently offer profitability to that
nation.

Neo Classical growth models:

These models focused on the very mechanisms that contributed to economic growth.
They stood correct in the economic circumstances at that time. Improvements have been
made to this model and even today several parts of the neo classical growth models are
used as a regular fixture in economic practices throughout the world.
The neo classical model was the first to label labor as a factor of production and from that
point on economists and economy as a whole counts labor as a factor of production.
The short run implications of the Neo-classical model do not involve labor, instead it
focuses on other factors but the long run implications of the Neo-classical model involve
labor, saying that economy develops at a steady rate of growth directly controlled by the
rate of technological progress and the rate of labor force growth.
The neo classical growth models also assumed that nations tend to utilize their resources
in an efficient manner and that increment in labor and capital resources eventually lead to
diminishing returns.

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A part of this model also measures technological progress by the productivity of labor.
The model uses two methods to calculate that, which are:
1) Average Labor Productivity Economic output per labor hour.
2) Multifactor productivity Output divided by a weighted average of capital and
labor inputs.

Modern day approaches:

Several modern day economists take into account the average number of years that a
labor spends in schooling as an input to the output of labor and the economic growth of a
nation. Using this theory it can be concluded that the level of quality of labor in a country
can reflect upon the level of quality of education of that particular country or the
infrastructure of education for that matter. It also reflects upon the fact that the level of
investment that goes into the human capital development has complete influence on the
enrollment ratios among universities in a particular country.
Keeping in mind that education is the most powerful and effective tool which empowers
human capital labor force to operate at its optimum, we can say that schooling among
public, dropout rates, graduation data and other such information clearly reflect on the
quality of labor that a nation possesses. Innovation and advancements in technology also
play a major part in the productivity of labor. It is also important to note here that
education aids the growth of technology almost entirely.
In addition to that the effective ability to adapt and implement new technology from
elsewhere around the globe is something that the labor force of a nation is accountable
for, which also reflects on the ability of the human capital force that a nation has. Thus
education not only controls the ability of a nation to adopt or catch up with technology
that other nations bring up but also helps a nation to develop and build upon new
technology of its own.
However, the extent to which the human capital of a particular nation directly affects its
economic development is largely dictated by degree to which the production at domestic
level is aided and controlled by the structure and use of innovative technologies of that
country.
Furthermore, if a country is backward in terms of technology but has an advantage in
human capital in terms of quantity compared to other countries that are ahead in

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technology, then it will succeed ahead of other nations which are better in terms of
technology within certain duration of time. In other words, if country A is ahead of
country B in technology initially but if country B grows ahead of country A in
terms of the level and quality of education then within a given time period country B
will not only catch up entirely with the technology that country A would be using but
country B would also grow ahead of country A in terms of technology. The level to
which country B grows ahead of country A in technology is directly dependent upon
the level of investment and advancement country B made to its education sector as
compared to its technological sector. A nation that possesses a high level of education
will always be ahead in terms of technology and economic growth, than nations that have
lower level of education. It is also important here to note that as long as the aggregate
level of improvement in education in a nation is always ahead of the aggregate level of
improvement in technology, then that nation would continue to have a strong economic
growth. The time when aggregate level of education slides down in comparative terms
with the aggregate level of technology then from that point onwards the economic growth
would suffer until the aggregate level of education rises above the aggregate level of
technology.
Thus nations with high education level can easily catch-up and narrow the gap in a short
span of time between them and other nations with reference to technology.
Keeping that in mind, several studies in the last decade say that if we take into account
three nations, one from the slightly poor category of nations on the planet (also known as
the third world nations) to be called nation C, the second from the group of those
nations that have displayed rapidly development to be called nation B and the third
nation from the best lot of nations on the planet, which basically include the super powers
(or the first world nations) to be called nation A.
Given that that the initial per capita income and the level of education is constant among
all the three nations but the rest of the entire economic scenario is according to the
described background of the three respective nations, studies indicate that nation C
would have a high level of innovation and would also be quick to adopt upon technology
from other nations. Whereas for nation B, the ability to adopt technology from other
nations and innovation at domestic levels is not a major concern and it does not focus on
these fronts as much, which means that human capital in nation B fails to be fully
functional in its role in this respect. Most surprisingly these studies indicate that nation
A considers the ability to adopt technology from other nations as entirely irrelevant and
the percentage with which nation As human capital delivers at this front is positive but
nearly equal to zero.

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Focusing on economic growth, recent studies indicate that political instability has
negative effect on personal savings and income distribution, consequently affecting
human capital development.
The average level of human capital in a nation directly dictates the per capita income
growth of that nation. One key factor that supports this theory is that the level of human
capital development of a nation controls the development of physical capital development
and total factor productivity of that nation which also influences the economy to a great
deal.
Furthermore, the level of investment and development in physical capital of a nation is
largely affected by human capital of that particular nation. Similarly, studies indicate that
physical capital massively dictates the per capita income growth, which in turn affects the
development of human capital as well. This phenomenon is also illustrated in the
following diagram.

Physical capital

Per capita income growth

Investment
Human capital development
Economic growth

At the core of human capital development, education has a vital role in driving
investments and technological advancements. Most importantly, advancements in
technology also make great contributions to the development of human capital and
sources of economic growth that dictates investment to a great deal, which also indirectly
underline the importance of the level and quality of education of a nation. Technology
can also entirely change the pattern of production of goods and services in an economy.
The following diagram illustrates the effect of education upon economic growth.

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Education

Technology

Development of total factor productivity

Development of physical capital

Per head income or Income growth

Innovation and job opportunities

Investment

Economic Growth

The following table (published in 2010), illustrates the amount of expenditure (in
percentage) that several of the first world nations make out of their total GDP in order to
improve upon their human capital resource. This study indicates that all nations
mentioned in the diagram below prefer to spend the indicated amounts (in percentage) of
their GDP on human capital development via primarily investment on three areas which
include health, research and education.

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Several studies in the past years indicate that political policies and the role of government
are central to human capital development, justifying this assumption by pointing out that
the degree to which education levels rise and\or fall, new employments, trades, salaries,
taxes and other such factors change directly due to government policies and laws.

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Defining productivity of human capital:

The rightful ability of the labor force to deliver is called its productive output. It takes
into account the amount of input required by the labor to produce the required output
consequently accounting for the efficiency of production. Therefore everything that
boosts the productive ability of labor is a source of productivity growth. Productivity also
reflects upon the amount of reward that a labor is to be presented with and the exact
detail of business/employer needs because output of the labor force clearly reflects upon
those facts. The following table shows output per worker from a group of nations. The
data clearly reveals that human resource development among the Middle East nations has
provided them with growth in terms output by a huge margin when compared with other
nations.

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Significant examples of modern day practices on human Capital development:

-

Accenture

Accenture are the biggest consulting firm in the world. On basis of that fact it can be said
that the labor they have is highly efficient and nearly excellent. In other words, the model
they use for development of human capital can be complimented as the best in the world.
On a broad perspective distinctive capabilities, market focus and performance anatomy
are the factors which Accentures research indicates that drive the basis of human capital
development. They underline that talent is the most important part of human capital
development because per dollar investment in human capital clearly reflects upon that
piece of information.
They believe that it is the factor that creates a difference between good and great or
average and good for that matter. Thus one of the areas they focus with stress is the
multiplication of talent of individuals, a philosophy they term as the talent multiplier.
Their research also says that although majority of organizations on the planet firmly
believe that human capital management is the most important part of success that
eventually leads to economic growth but effectively in contrast to that the statistics
clearly reveal that organizations invest 25-45% of their total revenue on their human
capital assets. Accenture also say that their recent research claims that organizations that
have downsized upon their human capital initiatives have been left to struggle in
comparison to those organizations that have focused on it even in the hard economic
climate of recent times. Accenture effectively identify five elements as the main criteria
among employees that make it entirely possible for an organization to achieve their
strategic goals, these elements include the adaptability of workforce, the in depth
performance of workforce, the engagement of employees, leadership and proficiency of
the workforce. Accenture rightly claims that they have developed a program that measure
the growth, performance capacity and talent within employees to enable them to not
only perform at their maximum potential but to also effectively improve and increase the
limit of their potential best. They call this tool the Accenture human capital development
framework.
Their research also says that only 14% of all top CEOs in Europe and America are
exactly sure of what to expect with their investments in human capital. A similar survey
on 335 executives from 7 countries revealed that 82% of the employers do not measure
employee capacity, effects of training, rapid and in-depth analysis on employee behavior,
employee satisfaction and detailed measures that confirm the productive outlook of the
organization for the future with reference to its employees so that organizations can
spend/utilize their resources accordingly.

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The Accenture human capital development framework (which is in use by numerous

organizations across the world), enables organizations to reduce and overcome on their
weaknesses by specific use of human capital aided with their methods. The Accenture
human capital development framework takes into account all the processes within the
organization, capabilities of the organization and the employees, key cultural aspects and
performance drivers along with the organizations overall results. The framework
analyses these four factors, establishes relevance and gives concrete solutions to
organizations so that they can enhance upon their profitability.

British multinational telecommunications services company (BT)

When it comes down to performance, health plays a vital role. A healthy employee will
always perform better than an unhealthy one (given both are at the same level with
respect to experience, qualification and everything else). BT just recently started to
monitor the health of their employees in connection to performance analysis which were
performed at regular basis in the organization.
BTs chief medical officer, Dr. Paul Litchfield was one of the key figures to trigger and
that get this process of health monitoring into motion. He pointed out that 26 of their very
important employees died prematurely in a single year due to illnesses that were related
to the heart.
This prompted the introduction of a health regime called work-Fit at the firm, which
was basically a voluntary program that included diet plans, fitness regimes and several
health related initiatives to improve the health of their staff. BT tells that they invested
nearly $1.6 million into this program.
In return, since the introduction of Work-fit at BT, the absence rates have been reduced
by more than one third and this alone bought in a saving of $49 million each year for BT.
BT also claims that they have had a saving worth $163 that are directly related to the
outcome factors of their Work-fit program within five years of introduction of the
program, explaining that they have had enormous improvement in retention and
productivity of employees.
Thus by focusing on the health of their employees, BT has enabled their human capital to
work and function in a much better way which in turn has bought a great economic
growth to the organization.

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National Rural Support Program (NRSP)

NRSP is the biggest rural support and development organization in Pakistan in terms of
revenue and staff. It does not only work at national level but at international level as well
and the government of Pakistan has seeked assistance for economic development several
times. The primary aim of this organization is to boost the economic situation of rural
areas via several techniques and methods.
Apart from focusing on education to bring about reforms and empower economic
development, what NRSP does differently is that they also spend a large part of their
funds to help in business development. NRSP does not directly invest in small scale
businesses for to develop them; instead they built a business development group that
focuses to directly help in the development of small scale businesses, eventually boosting
economic growth.
The business development group (BDG) not only assists to build small scale businesses
but also helps to create employment and trains unskilled people according with the needs
of the created employment. BDG does not only train unskilled people but also trains
skilled people and staff members from multinational organizations.
BGDs rural development plan normally operates in the following sequence:
1) To take into account the demands and service capacity of rural people.
2) To enhance their productivity in a systematic way this is designed according to their
learning abilities.
3) Efficient use of local resources to aid in the development of individuals
4) To specifically guide and educate individuals regarding entrepreneurship,
empowering them to plan and build themselves for sound long term economic
growth.
5) To establish a prominent link between the trained community and the appropriate
job market for the trained community.
6) To provide services that aid in building business structures and financial assistance
for business startups that enable skilled/trained individuals to economic selfsufficiency.
As a matter of regular practice NRSP calculates its performance by taking into account
the amount of training provided, time span, monetary aid given and input offered (in
terms of staff) in comparison with the rate of unemployment and economic status of
the geographical region that is focused upon.

Walmart

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With over two million employees, Walmart are the biggest private employer in the world.
The company is also the highest revenue generating organization in the world. The
strategic management that is in charge of the human resource (HR) at Walmart believes in
strong, sustainable and long lasting economic growth, which basically means that
Walmart prefer to take slow and calculated steps to innovation and adoption of new ideas.
Their stance on business growth involves a lot less focus on investment at various
sections of the business and intense focus on employee management to achieve
betterment among all sections of their business. As an important part of Walmartss focus
upon employee management, the organization specifically stresses upon
1)
2)
3)
4)
5)
6)

Employee motivation
Involvement and interaction
Better pay for employees
Employee engagement in Walmarts overall growth
Sense of belonging
Culture

Walmart tend to give a great deal of importance to how their employees feel about the
organization and their job at the organization. The human resource department was
renamed as the peoples department and every employee (even the founder) was to
address each other by their first name, hence giving a comfortable environment to
employees to work in with little or no boss-orientation. Walmart does not only care about
customer experience but it also cares a lot more about employee experience. Executives
at Walmart were told to use the term associates for all of their employees because Mr.
Sam Walton (the founder and CEO of Walmart) believes that by doing so it would give
all of the employees at Walmart a sense of family binding towards the organization along
with a great deal of motivation to work even better for their employers.
Mr. Sam Walton affirmed the role of their human capital saying that:
The more you share profits with your associates (employees); the
more profit will accrue to the company. Why? Because the way
management treats the associates is exactly how the associates will
treat the customers. And if the associates treat the customers well,
the customers will return again and again, and that is where real
profit lies, not in trying to drag strangers into your stores for onetime purchases based on splashy sales or expensive advertising.
In addition to that, Walmart provides health benefits, in which health checkups and
diagnosis for to a certain extent are included. They also provide financial benefits, such
as giving employees better salaries if the company is doing well, providing staff members
with discounted shares of the company and many more. Walmart also has a culture of

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promoting their employees if they have been fairly productive. Notable examples of
Walmarts intuitive promotion strategy include the following:
a) Larry English Started as a stock boy and ended up as a field manager,
b) Kevin Turner Started as a temporary cashier and ended up as a senior vice
president and the CIO of the company in 1999 (later promoted to CEO of SAMs
club which is a 30 billion dollar division of Walmart) AND
c) Theresa Barrera - Started from a part-time cashier and ended up as vice-president
of divisional merchandise at Walmart.
Thus, without bringing in any innovative methods to other sections of their organization
or the structure of the organization as a whole, Walmart have succeeded at their business
by realizing that their biggest asset are indeed their employees and right methods of
management have bought them success in the rapidly changing and competitive global
market.

Conclusive analysis:
Hence after our study on economic growth models of the past with specific information
on human capital development and samples from some of the worlds leading
organizations on human capital development that drives their economic growth reveal
that economic growth and economic growth go hand in hand. Human capital is the most
important factor for organizations across the globe and using the right techniques and
methods allows prominent economic growth for organizations.