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CHAPTER ONE
Investment in Human Capital Development: A Theoretical
and Empirical Review

Human capital is a broad concept, covering many characteristics contributing to grow
an individuals, firms or societys productivity. It includes not only knowledge and skills
but also talents, leadership qualities, work ethics and health etc. According to
economists, the ability of an economy to accumulate a high quality of human capital is
an important factor of economic development. Human capital theory assumes that
education is highly instrumental and necessary to improve the productive capacity of a
population.

The aim of this chapter is to describe briefly the human capital theory, importance of
education, mainly the Technical Education and Vocational Training (TVET), positive
experiences gained by some developed countries and importance of TVET for developing
countries like Sri Lanka in human capital development.

This chapter is divided into four sections. The first section is devoted to discuss the
theoretical background of human capital and effects of human capital on economic
development. The second section analyses the importance of education in human capital
development. The third section presents definitions of the term Technical and
Vocational Education and Training (TVET), and then examines the importance of
Technical and Vocational Education and Training in human capital development and
the relevant positive experiences of developed countries. The fourth section touches on
the importance of TVET for developing countries in their development struggle.

1.1 Human Capital Theory

In general terms, human capital is considered as the investment an individual makes in
him/herself to enhance his/her economic productivity. In a broader sense, human capital
is the stock of competencies, knowledge, social and personality attributes, including
creativity, embodied in the ability to perform labor so as to produce economic value. The
definition of human capital is referred to as the knowledge, skills, competencies, and
attributes embodied in individuals that facilitate the creation of personal, social and
economic well-being (Organization for Economic Co-operation and Development
OECD, 2001: 18).

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British economists, Sir William Petty (1623-1687) and Adam Smith (1723-1790) are
recognized as the developers of human capital theory. Petty in his Treatise of Taxes and
Contributions (1662) examined the role of the state in the economy and presented the
idea on the value of labor. Adam Smith established the basis of the economics of human
capital (Becker, 1992). In his masterpiece, The Wealth of Nations (1776), Smith
elaborated his theories with the prosperity or a wealth of a nation. According to Smith,
the main cause of prosperity was increasing division of labor. He is recognized as the
first to make a connection between the skill of the worker and higher wage levels
(Becker, 1992). However, traditional economists considered land, labor and physical
capital as factors of production. From the perspective of classical economic theory,
human capital considers labor as a commodity which can be traded in terms of purchase
and sale. In 1958, Schultz, in his essay on The Emerging Economic Science and its
Relation to High School Education, elaborated people as the source of economic growth
and described human capital as follows;
Consider all human abilities to be either innate or acquired. Every person is
born with a particular set of genes, which determines his innate ability.
Attributes of acquired population quality, which are valuable and can be
augmented by appropriate investment, will be treated as human capital
(quoted in Fitz-enz, 2000: 21).

In the early 1960s increasing attention was paid to the level of education and training
in the work place and it gave rise to the concept of human capital (OECD: 2001). Two
schools of thought regarding human capital concept emerged, over the next two
centuries. The first school of thought distinguished between acquired capacities that
were classified as capital on the one hand and human beings themselves who were not
capital on the other. The second school of thought claimed that human beings
themselves were capital. In modern human capital theory, all human behavior is based
on the economic self-interest of individuals operating within a freely competitive market
(Barro, 1999).

According to modern economists, human capital is rooted in the field of macro-economic
development theory (Schultz, 1993). The concept of human capital arose from a
recognition that an individuals or firms decision to invest in human capital (i.e. invest
in education and training) is similar to decisions on other types of investments as for
example on machinery, building and land etc. by individuals or firms. Unlike the

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traditionally associated meaning of the term labor, human capital refers to the
knowledge, expertise, skills and other attributes of individuals, which include a range of
personal, economic and social values. Generally, one accumulates these largely through
education and training, but may also reflect innate capacities. Some aspects of
motivation and behavior, as well as attributes such as the physical, and mental health
of individuals are also considered as human capital (OECD: 2001).

There are three main components of human capital: a) early ability (whether acquired
or innate); b) qualifications and knowledge acquired through formal education and c)
skills, competencies and expertise acquired through training on the job (Blundell et.al.
1999).

Beckers (1993) study on Human Capital: A Theoretical and Empirical Analysis with
Special Reference to Education further described the concept of human capital.
According to him, there are different types of capitals which include schooling, training,
fees on education and medical care etc. He considered the ethics such as honesty,
punctuality, commitment, responsibility and hard work etc. also as human capital.
Emphasizing the social and economic importance of human capital theory, Becker
(1993) highlighted that the most valuable of all capital is investment in the human
being. He distinguished firm/company specific human capital from general-purpose
human capitals. Expertise gained through education and training in management,
accounting, information technology and other expertise were taken by Becker as
examples of company specific human capitals, while knowledge gained through
education and training in areas of value to a variety of companies such as generic skills
in human resource development considered general purpose of human capital. However,
Becker (1993) considered education and training as the most important investment in
human capital.

This theory has further been described by Garavan et.al. (2001) and they have pointed
out four key attributes of human capital as follows: a) flexibility and adaptability; b)
enhancement of individual competencies, c) the development of organizational
competencies and d) individual employability. Rastogi (2000) also considered human
capital as an important input of organizations, especially for continuous improvement of
employees mainly knowledge, skills, and abilities.

Human capital is developed in the contexts of: learning within family and early child

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care settings; formal education (primary to tertiary, technical & vocational, labor
market training and adult education etc.); work place training (in-service training,
research, innovation participation in professional net-works etc.); informal learning
(on-the-job and civic participation) (OECD: 2001).
Measuring the economic impact of human capital can be done through the calculation of
productivity or earnings-based rates of return on investments in learning. Private
rates of return can be estimated using data on private costs and post-tax earnings over
a life time. Such private rates of return should include the non-monetary benefits like
pleasure of learning, and the job satisfaction etc. Social rates of return should include
the public and societal costs and benefits involved in investing in more human capital.
However, in practice, there are many difficulties in measuring correctly the full benefits
of human capital (OECD, 2001).

The concept of human capital plays a major role in modern treatments of growth theory
and of labor economics. In one sense, the distinction between the two is in levels of
aggregation. At the macro-economic level, the social stock of human capital and its
growth are central to the process of economic growth; at the micro level differences in
human capital stock and in their growth can explain much of the observed variation in
the wage structure and in the wage distribution among individuals and groups.

In a macro-economic approach, the development of human capital improves labor
productivity, facilitates technological innovations, increases returns to capital and
makes sustainable economic growth, which in turn, helps to reduce poverty. From a
microeconomic perspective, education increases the probability of being employed in the
labor market and improves earning capacity. At the micro level, human capital is
regarded as the component of education that contributes to an individuals labor
productivity and earnings while being an important component of firm production. In
this sense, human capital refers to the ability and efficiency of people to transform raw
materials and capital, into goods and services and the consensus is that those skills can
be learned through the educational system. Therefore, human capital development is
important for overall development of a country for its intrinsic value as a development
goal in its own right (Cohen and Soto, 2007).

Although pursued independently these applications view human capital and its growth
as a cause of economic growth: of the economy as a whole in the theory of growth, and of
individuals in labor economics (Mincer, 1995). Human capital is implicated in the

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process of growth not merely as a cause but also as an effect of economic growth or of
development generated by economic growth. However, the reciprocal relation between
economic growth and the growth of human capital is likely to be an important key to
sustained economic growth (Ibid.).
,
Rapid economic growth in many developed countries has been considered as a result of
investment in human capital at both the macro and micro levels. For individuals, such
investments were seen to provide returns in the form of individual economic success and
achievement. Most economists agree that it is human resources of nation, not its
physical capital nor its material resources, which ultimately determine the character
and pace of it economic and social development. Human resources constitute the
ultimate basis of the wealth of nations. Capital and natural resources are passive
factors of production, human beings are the active agencies who accumulate capital,
exploit natural resources, build social, economic and political organizations and carry
forward national development (Psacharopoulos & Woodhall, 1997).

According to Babalola (2003), the rationality behind investment in human capital is
based on three arguments:
a) New generation must be given the appropriate parts of the knowledge
which has already been accumulated by previous generations.
b) New generations should be taught how existing knowledge should be used
to develop new products, to introduce new processes and production
methods and social services.
c) People must be encouraged to develop entirely new ideas, products
processes and methods through creative approaches.

1.1.1 Effects of Human Capital on Economic Development

According to neo-classical economic theory, the effect of human capital on economic
development is explained either through the impact on labor productivity or through
the impact on total factor productivity. Economic development is not seen just as
economic growth, it is concerned with various other indicators such as literacy rates,
health status, life expectancy, poverty rates and income distribution etc. The original
Solow (1956) growth model included, however, only two production factors: labor and
capital, assuming that every employee is identical in terms of productivity. Uzawa
(1965) introduced the idea of the education sector in the economy. The employment in

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this sector, which in addition to traditionally understood education included also health
services and some other public services, conditioned labor productivity in the economy
(Herbst & Rok, 2013).

In turn, Lucas (1988) considered human capital as an individual feature of every labor
force member. In his model the employee with human capital equal to two is twice as
productive as the individual with human capital that equals one. According to Lucass
model the rate of Gross Domestic Product (GDP) per capita growth is equal to the rate of
human capital accumulation.

The second explanation on the effect of human capital on economic development
emphasizes the fact that human capital allows the creation and diffusion of technology.
Nelson and Phelps (1966) identify two channels through which this effect works. First, a
high level of human capital makes it possible to develop new technologies and increases
the effectiveness of production, which develops the economy rapidly. Second, human
capital allows developing countries to import technology from developed countries.

Among empirical studies on human capital and economic growth, Mankiw, Romer and
Weils (1992) work, organized on Lucas model, is considered as the most important one.
They illustrated that a 10% of increase in human capital stock was associated with a
gain in GDP per capita of 6.7% to 7.6%, by using data on national economies from
1960-1985. Though this study paved the way to the debate on human capital and its
relationship with economic growth, many researchers questioned this repeatedly.
Bernanke and Gurkaynak (2001) who did two similar researches by using the data
covering the period 1960-1985 and 1960-1995, gave a conclusion in accordance with the
observations of Mankiw, Romer and Weil.

Barros (1999) study, based on Nelson and Phelpss concept, illustrated that continuing
by one year the average duration of education after primary school has the effect of
raising the future rate of economic growth by 0.7% points. He concluded that not only
the level of formal education but also its quality has a strong influence on economic
development.

Some cross- country studies also have shown positive relationship between human
capital development and economic development. For example, Chen and Dahlman
(2004), who used data from 92 countries for their study, concluded that extending the

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average number of years of study by one year has an effect on increasing the economic
growth by 0.13%. Barro and Sala-i-Martins (2004) study, which used primary school
data from 100 countries also has illustrated a significant impact of human capital on
economic development during the period between 1965-1995. According to a
comparative study done on human capital investment by the OECD (1998:91), for
growth and prosperity to be sustainable, social cohesion is required; here too, the role of
human capital is vital.

Moreover, conclusions of many studies done on regional development have supported
the idea of positive influence of human capital on the regional development. A very
important research study on Human Capital, Demographics and Growth across the US
States 1920-1990 was done by Persson and Malmberg (1996), considering the factors
which influenced economic development in the different states of the United States.
They concluded that human capital had a strong positive relationship with state level
development but emphasized that the level of human capital in different states had
different influence on their growth. A similar study, done by Di Liberto and Symons
(2001) on factors that influenced on regional development in Italy too illustrated that
education had played a vital role in development of the southern parts of the country.
The positive link between the human capital and regional development was emphasized
by another study done by De la Fuente and Domenech (2002) in Spain. They mentioned
that the equality in educational facilities and development of technology as main factors
which influenced regional development of Spain. Badinger and Tondls (2002) study on
regions of ten European Union (EU) countries, too found the positive influence of
human capital at the higher education level on economic growth. However, this study
did not find any clear relations between the secondary level education and the regional
growth. Furthermore, this study illustrated that the regions where the economy was
more open or liberal but with low levels of economic development and human capital,
developed rapidly by importing or borrowing various knowledge and skills gained by
developed regions. Japan, a case of study of this research provides evidence to prove
this conclusion. The significance of human capital for regional economic development is
also supported by another study done on some selected regions of EU countries in the
period of 1995-2003 by Lesage and Fischer (2008). They demonstrated not only the
positive impact of human capital on regional development but also a positive spatial
effect which means that development occurs faster in regions with higher educational
potential.


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Some studies (Onyinyechi & Akamike, 2011; Iniobong, 2012) done on developing
countries also suggested that human capital is the ultimate basis of wealth creation and
key to the development of underdeveloped countries.

Investment in human capital has also been widely documented as a core component of
each individuals human development, firm growth and aggregate productivity growth
(Lucas, 1988). A large number of studies have been done on human capital and their
implications for performance of organization and they have illustrated the positive
relationship between human capital development and greater achievements of
organizations (Agrawal, 2003; Guthrie et.al. 2002; Lumpkin et.al. 2005). Dearden et.al
(2006) and Conti (2005) estimate the differential effect of training on productivity and
wages. The former finds that training increases productivity by twice as much as it
increases wages, while the latter finds only effects of training on productivity.
Furthermore, there are some findings that incorporate human capital with higher
performance and sustainable competitive advantage (Norudhaug, 1998); higher
organizational commitment (Iles et.al. 1990); and enhanced organizational retention
(Robertson et.al. 1991).

Although, human capital theory concludes that investment in human capital leads to
greater economic outputs, the validity of the theory has been questioned. Some studies
such as Benhabib and Spiegels (1994) and Kruger and Lindahls (1999) did not show a
direct influence of human capital on economic development. Conclusions of such studies
questioned of human capital on development. As a result, some researchers developed
systems of data analysis by taking not only the quantity (or number of years of
education) but also the quality of education into consideration. For example,
introducing the international measuring systems of students abilities, such as Trends
in International Math and Science Study (TIMSS) -1995 and Program for International
Students Assessment (PISA) - (2000) improved the relevant data analysis (Herbst &
Rok, 2013). However, many recent studies demonstrated that such conclusions were
reached owing to the weakness of statistical data or poor quality of education and
proved that development of human capital had immense influence on socio-economic
development (Arnold; Bassanini et al. 2011; De la Fuente & Domenech, 2006). Moreover,
researchers such as Hanushek and Woessmann (2007), who measured the quality of
education by using the new test methods confirmed that the influence of the real skills
of workers on their income level.


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In the new global economy hard tangible assets such as land, machines and buildings
etc. may not be as important as investing in human capital. As the global economy
shifts towards more knowledge-based sectors, skills and human capital development
have become a focal issue for policy makers and implementers engaged in development
(OECD, 1966).

1. 2 Education as an Investment in Human Capital Development

The human capital theory has undergone a rapid development. Within its development,
greater attention has been paid to education, training and related aspects. Education,
which is considered as an economic good, is an engine of growth and key to development
in every society, based on its quality and quantity. Economists regard education as both
a consumer and capital good, because it offers utility (satisfaction) to a consumer and
also serves as an input to develop the human resources necessary for economic and
social transformation. Human capital theory emphasizes how education increases the
productivity and efficiency of workers by increasing the level of cognitive stock of
economically productive human capability, which is a product of innate abilities and
investment in human beings (Almendarez, 2010). Not only formal education but also
informal education, training outside school and on the job training etc. are also ways to
invest in human capital development. According to the human capital model presented
by Zula & Chermanck (2007), there are four types of educational investments in human
capital development, viz. formal education, general training at work place, specific
training at work place and other knowledge. (See the Chart: 1)

There are two main ways of explaining how expansion of education accelerated
socio-economic development. The first is to view education as an investment in human
capital. The second view of the role of education in the economic success is that
education has positive externalities; educate a part of the community and the whole of it
benefits (Almendarez, 2010). Some classical economists such as Smith (1976) and
Van-Dan-Berge (2001) too mentioned that there is a positive worldwide externality that
society would gain from a more educated labor force and population. The studies on
human capital theory and education can be divided in to two levels, viz. micro and
macro level. At the Micro level, the theory explains that an individual bears the direct
costs (school fees) as well the indirect cost (time) of education because he/she expects
that this investment will create a future stream of benefits such as higher wages to
him/her. At the macro level, education and the creation of human capital is responsible

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for both the differences in labor productivity and the differences in overall levels of
technology.
Chart:1


The importance of education as an investment in human capital development has been
brought out in many studies mainly by Becker, Schultz, Lucas, Mincer, Denison and
Psacharopoulos & Patrinos. According to Beckers explanation, human capital concept
begins with the assumption that individuals decide on their, education, knowledge,
training, skills, and health care by weighing the benefits and costs. Benefits include
cultural and other non-monetary gains along with the improvement in earnings and
productivity. Becker argued that education and training are the most important
components of investments in human capital and income of a trained and educated
person is generally higher than that of an uneducated individual. (Becker, 1962; 1992 &
1993). Both Schultz (1960 & 1961) and Becker, (1964) argued that based on rational
expectations of returns on investments, individuals make decisions on the education
and training they receive as a way of augmenting their productivity. In short, human
capital theory identifies (Mincer, 1962; Becker, 1962 & 1992) that education and
training bring benefits in higher productivity and higher wages. An OECD (2000) study
done on human capital and growth also gives evidences of very high private returns to
education, in the form of higher wages mainly for degree holders.

Employees who have more education, tend to have more rewarding occupations
(Featherman & Hauser, 1978); better earnings (Dickens & Katz, 1987) and higher
wages (Card, 1998). Gary (1993) emphasized that education as an investment has

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future benefits of creation of status, job security and other financial benefits. According
to Mincer (1997), from the individual level, a greater human capital stock is associated
with greater productivity and higher salaries. Yesufu (2000) indicated that education
and job training as the most important direct means of upgrading the human intellect
and skills for productive employment. Improving job performance and promoting
management efficiency have been considered by him as advantageous of staff training.
Gomez (2010) stated that educated individuals can adapt to latest technologies and
production practices as well as become more mobile and entrepreneurial. According to
Gomez (2010), education can impact on individuals saving capacity and reduces the
dependency syndrome.

Research studies done on adult literacy in various countries also have shown a positive
linkage between literacy skills and earnings though varies among countries. For
example, Raudenbush & Kasims study (1998) demonstrated that economic returns to
literacy skill increase with the knowledge intensity of jobs in the United States. OECD
and Statistics Canada (2000) showed that education, literacy, experience, gender,
parents education and ability to use native language are related positively to human
capital, mainly in labor market earnings.

For example, some studies, done by Levy et al. (1992); Juhn, et al. (1993) and Nickell,
(2004) also have concluded that skills have an increasing impact on the distribution of
income and that the income distribution becomes more dispersed in reflection of
growing rewards to individual skills. The studies done by McIntosh et al. (2001) and
Finnie et al. (2002) respectively on British and Canadian wage patterns and educational
levels also found strong returns to human capital investment. Psacharopoulos and
Patrinos study on Human Capital and Rates of Return (2004) concludes that
educational quality has a strong influence on individual earnings and economic growth,
which is termed monetary benefits.

Several empirical studies support the idea on the aggregate effect of education and
training on development by giving various evidences. For example, Griliches (1970)
demonstrated that one third of the Solow (1957) residual (i.e. the portion of the output
growth in the American economy that could not be attributed to the growth in labor
hours or capital stock) could be accounted for by the increase in the labor forces
educational attainments. In the same manner, Denison (1979) showed the effects of
education upon per capita income in the United States. Baumol et al, (1989); Barro

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(1991) and Mankiw, et al. (1992) also confirmed these positive relationships between
education/ and training and development by giving cross-country evidences.

Barro and Lee (2010) illustrated that increasing average years of schooling by one year
increases per capita GDP by 1.7% to 12.1% depending on specification, Cohen and Soto
(2007) estimated returns to years of schooling at 12.3% to 22.1%. Testing the impacts of
schooling quality on development, it was found that a unit increase in countrys average
cognitive test scores increase per capita GDP growth rate by 1.2 to 2.0 percentage points.
Moreover, increasing average math and science scores by one unit increase per capita
GDP growth rates by 2.0 points, and by 2.3 points for low-income countries. Denison, et
al. (1976); Godo et al. (1999) and Miyazawa, (2011) have illustrated the direct positive
relationship between increase in human capital in Japan and its economic growth.
Investing in education not only raises GDP, but also reduces poverty and inequality.
From a national perspective, educational expansion has significantly contributed to
national economic growth (Jorgenson, 1984); an educated population of a country is
more likely to attract foreign investment (Gomez, 2010). Persson (1994) and Fishlow
(1995) agreed that inequality is negatively related to economic growth. Stiglz (1998)
argued that successful development not only closes the gap in physical or even human
capital but also closes the gap in knowledge.

Human capital theory also identifies the non-monetary benefits gained by the
individuals as a result of investment in education. Villa (2000: 21) describes it in the
following manner:
The economic benefits that education bestows are not limited to higher
expected production or lower production costs. They could also consist in direct
additions to welfare possibilities in terms of longer life expectancy, less
criminal behavior, stronger social cohesion or greater political participation.

McMahon (1999) argued that increasing the number of educated individuals in the
society would lead to increase health status of the society, decrease crimes, improve
democracy, maintain rule of law and strengthen political stability. According to Eyben
(2004), education empowers people more to advance their interests and resist
exploitation. Bassel (2008) emphasized that, educated individuals are more aware of
how to avoid health risks and to live longer, have smaller families, exhibit better
consumption and saving habits and more comfortable lives.


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It is also widely accepted that education creates improved citizens and helps to upgrade
the general standard of living in a society (Becker, 1962 & 1992). Several prominent
studies have illustrated that education plays a pivotal role in increasing the production
capacity of workers which finally leads to sustainable development (Schultz, 1971;
Sakamoto & Powers, 1995). Babalola (2003) argued that the rationale behind schooling
and human capital development is the need for people to be encouraged to develop
entirely new ideas, products, process and method through creative approaches, so as to
introduce new process, production and social services. Thus, education is considered as
an investment in human capital, which proponents of the theory have regarded as
equally or even more worthwhile than the of physical capital (Woodhall, 1997).

Education is an asset that generates not only earnings, but also a stream of non-market
utilities involving learning and culture. As such, it can be viewed as a consumption good
which, therefore, is directly related to income. The positive income effects apply also to
the acquisition of education as an investment good, to the extent that imperfect capital
markets necessitate a degree of self-financing of education. The positive effect of
parental income on school enrollment of their children is documented in many
micro-economic and inter-country comparative studies (Mincer, 1995). Doucouliagos
(1997) also has elaborated human capital as a source not only to motivate workers and
boost up their commitment but also to create expenditure in human resource
development and eventually pave a way for the generation of new knowledge for the
economy and society in general.

In addition to these positive influences, investment in education results in spillovers
that benefit others who work with or near individuals who have made such investments.
According to early models of economic growth, no explicit role of education or potential
of human capital to generate externalities or spillover influences were not identified.
However, with the development of the new growth models (Lucas, 1988; Romer, 1990;
Barro & Sala-i-Martin, 1995) the role of education in innovation and developing
technology was given more importance. They emphasize that such innovations, skills,
knowledge and technology etc. will increase the productivity in other sectors,
neighboring areas and regions. Spillovers provide the economic justification for public
subsidies for education and motivate community interests in improving the educational
attainment of the population (Babalola, 2003).

At the macro level, Robert (1991) developed a human capital model which shows that

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education and the creation of human capital is responsible for both the differences in
labor productivity and the differences in overall levels of technology. According to him
this explains the spectacular growth in East Asian countries that have given education
and human capital their current popularity in the field of economic growth and
development. Fagerlind and Saha (1997) emphasize that human capital theory provides
a basic justification for large public expenditure on education both in developed and
developing countries, because the theory is consistent with the ideologies of democracy
and liberal progression found in most western developed societies.

From the organizational point of view, Galle et al. (1985) emphasized that the industries
with more educated workers have greater productivity. Snell et al. (1999) and Seleim et
al. (2007) found out that the human capital indicators, mainly the education and
training of workers, had a positive relationship on a companys achievements. The
industries and education and training are also linked to the longevity of companies
(Bates, 1990) and greater tendency to business and economic growth (Goetz et. al. 1996).
After reviewing the impact of technical and vocational education in various societies,
Abramovitz (1986) concluded that education and vocational training as a part of a set of
key ingredients sustaining societys growth, which he termed social capability.
According to this literature it can be concluded that there is a great impact of education
and training on human capital development and it has a positive correlation between
the individual and organizational achievements and national development. Crouch
(1999) has provided some evidences to prove that highly educated workers were more
likely to be employed in sectors exposed to international competition. He also illustrated
the close associations between educational and training levels of workers with their
success in technological functions. Liu and Sakamotos (2002) study on the role of
schooling in Taiwans labor market also clearly supports the view of education as
productive human capital and provides limited backing for the notion of a mechanism
for labor market screening.

Another way of looking at education in human capital development is to view it as a
critical input for innovations, research and development activities. According to this
approach, education is considered as an intentional effort to increase the resources
needed for creating new ideas and then it leads to development technology. Some
studies have shown the positive relations between the education and training and the
technical skills. According to Nelson & Phelps (1966) a more educated and skilled
workforce makes it easier for an industry/company to plan and implement new

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technologies. Furthermore, Bartel et al. (1987) and Wolff (1996) found that education
and training levels are positively related with technological change in
industries/companies. Altbach and Levy (2005) developed a human capital model, which
shows that education and the creation of human capital was responsible for both the
differences in labor productivity and the differences in overall levels of technology.

The World Bank (1993) found that improvement in education as a very significant
explanatory variable for East Asian economic development. An international Adult
Literacy Survey done by the OECD and Statistics Canada (2000) also showed a strong
link between levels of literacy and outcomes in terms of labor market, civic participation
and social outcomes. In considering the human capital theory, the OECD has stressed
that the overall economic development of the OECD countries is more directly depend
on their knowledge stock and learning abilities (OECD, 2001). All developed countries
have not only considered education as a key determinant of development throughout
their socio-economic performance, but also have re-theorized it recently under human
capital theory as a major economic device. Human capital theory emphasizes the
significance of education as the key to participation in the new global economy. However,
it should be noted that education is a source of socio-economic development only if it
liberates, stimulates and informs the individual and teaches him/her how and why to
make demands. To contribute significantly to socio-economic development, education
should be of high quality and also should meet the skill needs and labor market
demands of the country. Without a quality education, developing nations will not be able
to compete in the global market. Therefore it is an essential need to focus on education
as a development strategy. A proper educational strategy will manifest itself in four
major development-producing capacities. According to Bronchi (2003) those are: a) the
development of a general trend (increase in literacy) favorable to economic growth; b)
the development of complementary resources for factors which are relatively plentiful
and substitute for relatively scarce factors; c) the durability of educational investment
(education has more durability than most of non-human capital); and d) education is an
alternative to consumption, for it transfers to round-about production the resources that
would otherwise be consumed now.

1.3 Importance of Technical and Vocational Education and Training (TVET) in
Human Capital Development

Technical and Vocational Education and Training (TVET), which refers to education and

16

training that prepare people for gainful employment (Finch & Crunkilton, 1999), is
important as capital investment. Before explaining the relationship between the human
capital development and TVET it is important to define the term since it is a complex
field.

1.3.1 Definition of Vocational and Technical Education and Training

Different countries have different terms to describe the elements of TVET. These
include apprenticeship training, vocational education, industrial arts, technical
education, technological-vocational education, occupational education, vocational
training and career and technical education etc. There are also several different
dimensions that can be used to define vocational and technical education and training,
for example its venue (company based, school based) and character (initial, continuing)
etc. (Maclean & Adlai, 2011). However, at the second International Congress on
Technical and Vocational Education, held in the Republic of Korea in 1999, United
Nations Education and Science Council (UNESCO) and the International Labor
Organization (ILO) jointly agreed to use the term Technical and Vocational Education
and Training (TVET) in order to bring all fields together. The 2001 UNESCO and ILO
Revised Recommendations concerning Technical and Vocational Education uses
technical and vocational education and training as
a comprehensive term referent to those aspects of the educational process
involving, in addition to general education, the study of technologies and
related science, and the acquisition of practical skills, attitudes, understanding
and knowledge relating to occupations in various sectors of economic and social
life (UNESCO and ILO, 2002).
The Revised Recommendation defines technical and vocational education as:
a) an integral part of general education
b) a means of preparing for occupational fields and for effective participation
in the world of work
c) an aspect of lifelong learning and a preparation for responsible citizenship
d) an instrument for promoting environmentally-sound sustainable
development.
e) a method of facilitating poverty alleviation.
f) It includes aspects of education that are technical and vocational in nature,
provided either in educational institutions or under their authority, by public
authorities, the private sector or through other forms of organized education,

17

formal or non-formal, aiming to ensure that all members of the community
have access to the pathways of lifelong learning. (Ibid.: 7)

1.3.1 Importance of TEVT in Human Capital Development
The importance of TVET for social and economic development has been widely
recognized. In explaining human capital theory, Schultz (1971) defined that human
capital as knowledge and skills obtained by individuals as capitals in the process of
vocational and technical education. Young people and adults increasingly recognize that
vocational skills are needed for participation in the world of work. TVET is not only
important in providing employment opportunities to individuals but also helps in
enhancing the productivity of industry/companies. According to Caillods, (1994: 241):

Vocational education and training are indispensable instruments for
improving labor market mobility, adaptability and productivity, thus
contributing to enhancing competitiveness of firms and redressing labor
market imbalances.
For governments, public TVET is seen as essential for enhancing economic
competitiveness and for contributing to social inclusion, poverty reduction and
sustainable development. As well as responding to labor market trends, public TVET is
expected to equip learners with basic skills and to support personal and social
development. Employers are increasingly emphasizing the need for new soft skills,
such as communication, negotiation and team working, in addition to technical
knowledge and ability. The demand of the economy affects both industrialized and
developing countries. In particular the need for technical personnel in developing
countries is crucial and places great pressure on systems for TVET and the limited
national resources.

At the end of the 20th century the need for a vocational, technical and educational
knowledge and skills for the development of the worlds economy was clearly manifested
in the improvement of diversity in industrial and service fields. As a result, it was felt
that the world needed not only a workforce trained in technical and vocational skills but
also a highly competent skilled workforce including technicians and technologists in
specific areas in industries. From the beginning of the 21st century, the progress made
in industrialization was due to the high capacity of the trained workforce. Therefore
economic development in the world seems to have depended entirely on the knowledge
based skill development. In any country that evolved into a technologically advanced

18

one, TVET must have played an active and vital role, as skilled manpower would have
been required, to ensure sustainability as well (Usman & Pascal, 2010).

Cosh et al. (2000) found a positive and significant effect of TVET on product quality in
manufacturing firms in the United States. Ng and Siu (2004) found that job related
TVET has a significant positive impact on productivity in manufacturing firms in China.
Similarly, Jones (2011) has found that the effect of the share workers received TVET
has a positive and significant effect on productivity in the manufacturing sector in
Ghana.

The benefits of TVET for firms can appear in a wide range of other forms of economic
performance too. First, TVET may have external effects through innovation and
spill-over. This is emphasized by the new growth theories (Barro and Sala-I-Martin,
1995). New knowledge and competencies embodied in higher educated workers are
often transferred to other workers. The same is true for new knowledge that is
embedded in new products. A higher share of workers with a TVET background may be
favorable for innovation and knowledge transfer. Baker and Thompson (1995) examined
GP practices which were generally small organizations and found positive and
significant effects of TVET on innovation. Similarly, if TVET adds to the skills of
workers this may also affect product quality positively. If TVET has a stronger impact
on product quality and productivity than on wage costs, it will improve competitiveness.
Moreover, Hempell (2003) has found positive and significant effects of the share of
workers with TVET on value added of firms in the business-related and distribution
services sector in Germany.

TVET is important in other aspects such as alleviating mass unemployment, providing
specific skills for self- employment, preventing mass movement of school leavers from
rural to urban areas, and re-orientating student towards the rural society (Lillis &
Hogan, 1983; Tilak, 2002). As Khalil Mahashi Director International Institute for
Educational Planning) says the purpose of TVET is essential to promote and support
the development of a country, facilitate transition from school to work for millions of
school leavers, and foster equality of opportunity and social cohesion. It also has a key
role to play in addressing current problems, such as the fight against poverty, the food
crisis, and deterioration of the environment (www.iiep.unesco.org). According to King
and Palmer (2010) the provision of TVET skills is often assumed to reduce both poverty
and unemployment. It is assumed that someone with employable skills will find

19

employment, leading in turn to earned income and a higher standard of living. It means
the skills for poverty assumption is directly linked to the skills for employment
assumption: both presuppose that work is a primary route out of poverty and that skills
must result in work. Moreover, TVET has been considered as an integral part of a
reintegration that creates and facilitates new opportunities and livelihoods for
ex-combatants and for communities by enabling the possibility of building realities that
differ considerably from pre-conflict ones. According to Kingombe (2012), TVET
programing as a part of disarmament, demobilization and reintegration has the real
potential to raise expectations and create livelihoods and employment.

1.3.2. Relevant Positive Experiences of Developed Countries

The level, type, effects and progress of TVET vary widely across countries, and this is
not necessarily linked in similar ways to every countrys state of economic development.
Different studies about the effect of TVET on individual and company achievements
have found different effects. For example, MartInez & Levie et.al. (2010) argue that the
impact of TVET training does vary according to the level of economic development of a
country. They said that it appears to have greater effect on early stage entrepreneurial
activity in countries with favorable institutional contexts. Furthermore, they concluded
that the TVET was particularly effective in West European countries with low rates of
early stage entrepreneurial activity, such as Belgium, Germany, France and the
United Kingdom. However, the effect of the TVET depends on the contents, field
training, teaching methodology, assessment and monitoring procedures of courses,
ability and status of teachers, its relevance to a particular company, the group at which
the TVET is directed and its performance etc. (European Centre for the Development of
Vocational Training , 2011).

In practice, the outputs of a well-structured TVET system have led countries such as
Australia, Canada, Germany and Japan to become global leaders in all aspects of their
enterprise in a very short space of time (Iack, 2009). According to Iack (2009), these
countries were successful mainly due to key strategies such as, promoting and
marketing TVET as a viable alternative to the more traditional mode of advancement
and education; developing industry-led standard-setting bodies; establishing labor
market observatory; increasing the employability and participation of vulnerable
groups in TVET; establishing national training funds; making legislations for the
funding, accreditation, standard setting and quality assurance within the national

20

training system; developing modern curriculum and providing information on careers
and proper career guidance etc. used by them.

The dual system of TVET is well developed in Germany, integrating work-based and
school-based learning to prepare apprentices for successful transition to full-time
employment. Some studies point out that the gap between general unemployment and
youth unemployment in Germany is comparatively small relative to other OECD
countries. This is mainly due to the dual system of TVET, which opens up good
possibilities for young adults to enter the world of work (Schanarr, at el. (2008);
Hippach-Schneider at el. (2007); OECD, (2010). Not only has this system proved its
success over a long period, and it still shows its ability to react quickly and effectively to
the many changes currently affecting the German economy and society (The German
Vocational Training System: An Overview, 2013).

Studies done on Australian TVET system show that it has played a critical role in
creating individual and community confidence (Janelle at el. 2006). According to a
report presented to the National Skills Standards Council (2013) the skills and
education system of Australia plays a critical role in delivering sustainably higher living
standards through forming one of the pillars of productivity (foot notes : As outlined in
Australia in the Asian Contemporary White Paper Chp.5: key points, the five pillars
of productivity: skills and education, innovation, infrastructure, tax reform and
regulatory reform.) Moreover, the National Panel for Economic Reform (2013) states
that the skills and education in Australia create economic benefits through enhancing
civil society, providing greater opportunities and generally improving life outcomes.

Though Japan has few natural resources, it has very high productivity and a high per
capita income. A key contributing factor to this is that Japan is less dependent on its
natural resources and relies on its own trained human capital. According to a study
done by the OECD on vocational education and training in several developed countries,
such as Australia, Belgium, China, England, Germany, Mexico, Norway, and
Switzerland have well developed TVET systems(OECD, 2010). This study shows a
number of strengths of the TVET systems in the above mentioned countries. In
Australia, the dual system with well-structured apprenticeships that integrate learning
in schools and work place training, local autonomy and social partner involvement at all
levels in TVET policy design and delivery, well-established National Vocational
Qualification System (NVQ), catering for broad range of social needs and well-prepared

21

and industry experienced teacher work force etc. have been identified as positive
characteristics. In Germany too, the main features such as work based and school based
dual system, offerings of qualifications in a broad spectrum of professions, high degree
of engagement of ownership on the part of employers and other social partners, well-
resourced with public and private funds and well-developed and institutionalized TVET
research capacity have been emphasized as factors influence the TVET system to be
successful. The TVET system in Switzerland has also been identified as a strongly
employer and market driven system. School and work based learning, partnership
between confederations, cantons, and professional organizations, well-resourced and
up-to-date equipment, pathways to allow for mobility up-to tertiary levels,
well-trained teachers, well-functioned quality control, systematic and professional
career guidance services and institutionalized research and data collection system to
support policy changes are recognized as positive factors which have influenced the
Swiss TVET system to be a model (OECD, 2010).Moreover, the OECD study (Ibid.)
emphasized that features such as flexibility, commitment of government mainly in
funding and relevant policy designing and implementing, cooperation among various
stake holders, catering to different strata of the society, well trained teachers, efficient
evaluation systems, institutionalized career guidance systems and well-developed
research facilities etc. in Chile, England, Mexico, Norway and China as lessons that can
be learned by other countries in developing their TVET systems. Thus, availability of
skilled man power is an essential factor for the success of socio-economic development of
many developed countries, and developing countries can learn many lessons from such
TVET systems.

Some East Asian countries are considered as best examples of the TVE system being
well established (Tzannatos & Johnes, 1997). Newly Industrialized Countries (NIC) in
East Asia have achieved a great advance, in spite of a shortage of natural resources,
during recent decades, mainly by investing in developing the skills of the labor force.
Among the East Asian countries, mainly Singapore, South Korea, Taiwan and Malaysia,
the TVET systems have contributed significantly in the process of economic
development (ADB, 2004; Cantor, 1985). Through mass literacy, better trained healthy
workforce and investment friendly government policies, these countries have been able
to achieve a rapid growth (Tzannatos & Jones, 1997). Ul-Haq and Haqemphasize this in
the Human Development Report in South Asia (1998: 96) as follows:
Vocational and technical education is a passport to better employment
opportunities. This is the experience of Japan and the East Asian

22

industrializing tigers where unemployment rates have remained consistently
low, both because their populations possessed employable technical skills and
because of the high economic growth rates that these skilled populations
engineered.

Singapores TVE system has been considered as a world class model and it has played a
vital role in industrialization and economic development (Sakellariou, 2003; Seng, 2008;
Mun, 2008;). According to Mun (2008: 139),
Education through polytechnics has been the backbone of Singapores
industrialization. These polytechnics have a very clear mission: to train and
produce technologists and middle level professionals to support the economic,
social and technological development of the country.

Seng (2008) emphasized that the success of the Singapores TVET system is mainly due
to the evolving nature of the system by responding to the various phases of economic
development. He said:
As the economy restructured and moved from labor intensive to capital
intensive, and then to knowledge intensive, the TVET system responded to
ensure that the workforce had the relevant knowledge, skills and values. The
educational and training systems were reviewed, upgraded, and remodeled to
stay relevant and responsive to the needs of school leavers, industry and
community (Seng, 2008: 132, 133).

In South Korea TVET has contributed substantially to economic and social development
(Westphal, 1990), though now facing various changes due to globalization and changes
of economies (Chae & Chung, 2009; Chung, 2010).

A study on the role of vocational education in economic development in Malaysia too has
revealed that vocational education and training has contributed to its economic
development. It further concluded that vocational programs were more appropriate
than general academic programs for developing new skills and the ability to use
contemporary technologies (Mustapha & Greenan, 2002). Thus mainly due to the vital
role played by the TVET sector, economies of some of these East Asian countries
continued to grow for well over three decades.

Addressing this East Asian issue, in the 1980s, a new paradigm which is now commonly

23

known as endogenous growth model was developed, mostly due to Paul Romer (1986).
It proposed that if a firm which invests in capital also employs educated and skilled
workers who are also healthy, then not only will the labor be productive but it will also
be able to use the capital and technology more efficiently (Romer, 1986).

1.4 Importance of Technical and Vocational Education and Training for Developing
Countries

Literature on human capital development and technical and vocational education in
less developed countries suggests that the development of those countries is related to
their ability to develop and utilize their human resources effectively (Middleton et.al.
1993). During the 1960s and 1970s, TVET in less developed countries was looked upon
with a great deal of enthusiasm by government and international donors. Human
resource strategies in those countries embraced TVET as the main cure for the lack of
skilled workers to meet the demand of the economy, reduce unemployment by providing
individuals with employable skills, and enhancing attitudes towards mainly blue-collar
workers (Middleton et.al. 1993; Middleton & Ziderman, 1997).

However, since the 1980s some studies have revealed that a large percentage of
graduates of TVET programs were unable to find jobs that used their skills and the
system was in crisis (Salmi, 1991; Lewin, 1993; Tilak, 1988). Foster (1987) argued that
TVET was not suitable for developing countries but it would be successful in developed
countries. Furthermore, compared with general education, some studies concluded that
TVET is not only more expensive than general education (Psacharopoulos, 1987; Tsang,
1989), but also produces lower social and financial return on investment than general
education (Grooteart, 1990; Salmi, 1991; Bennell, 1996). Psacharopoulos (1991) also
presented several arguments such as the sociological argument, technological argument,
lifetime argument, occupational replenishment argument, supply-response argument
and cost argument, against the suitability of TVET for developing countries. However,
he did not totally reject TVET in developing countries whilst suggesting that it should
focus on peoples needs. His suggestions included, prioritizing the improvement of
reading and writing skills, locating TVET outside the formal education system,
motivating on-the-job training and minimizing the influence of the government in
TVET education etc. in improving the TVET sector.

Evidence produced by such studies had some influence on the World Bank and other

24

funding agencies to decrease their assistance to TVET in developing countries (IBRD,
1995). Instead, international organizations and many developing countries paid more
attention on primary and secondary education (Salmi, 1991; Bennell, 1996). As a result,
mainly due to lack of resources and support systems the TVET systems in developing
countries could not afford qualified teachers, proper curriculum development, effective
assessment systems, practical trainings, modern equipment and other facilities. Several
studies have shown that the TVET systems in developing countries deteriorated mainly
due to financial constraints and related factors (Salmi, 1991; Middleton et.al. 1993;
Bennell, 1996).

However, in the early 1990s some arguments in favor of TVET in developing countries
were put forward. For example Watson (1994) argued that the TVET would transmit
certain values and attitudes necessary to perform in the economies of developing
nations; would provide specific skills for people and alleviate unemployment; prevent
mass movements of unemployed youth; help to improve job performance; promote work
ethics and values; and would prepare people for technological change.
UNESCO-UNEVOC International Centre (2003), supported that TVET could play an
essential role in promoting economic growth and socio-economic development of
countries, by helping to improve incomes, providing more choices in life, helping to
alleviate poverty, empowering people and promoting good citizenship.

At present, TVET is very much back on the global educational agenda after its
disappearance from international aid in the early 1980s when the World Bank radically
shifted its policy from TVE support towards investment in primary education.
Worldwide trends in the development of education show that considerable efforts have
been made by many countries to expand and modernize TVET. TVET has been an
important area of focus in the UNESCO development agenda. UNESCOs policy in
TVET has been guided by the recommendation concerning TVET, which was adopted by
the United National General Conference in 1962 and revised in 1974. Under objectives,
the revised recommendation refers to the contribution of TVET to societys goals of
greater democratization, social, cultural and economic development; at the same time it
refers to developing the potentials of individuals for active participation in the life of the
community. It has been suggested that TVET should exist as part of a system of lifelong
education and that it should begin with a good foundation in general education and a
broad basic technical and vocational education; in order to facilitate horizontal and
vertical articulation within the education system and between school and employment

25

as well as adaptation to scientific and technological progress. (UNESCO, 2000).
Furthermore, UNESCO launched a TVET and skills strategy reflecting a growing
interest in the skills agenda (King, 20019). The 2012 Education for All Global
Monitoring Report also pays particular attention to the skill development, emphasizing
strategies that increase employment opportunities for young people and marginalized
groups. The report has identified three main types of skills that all young people need:
foundations skills (literacy, numeracy); transferable skills (communicative, innovative,
leadership and ability to sole conflicts); and technical and vocational skills (job specific
knowledge and skills) (UNESCO, 2012).

Thus TVET is back on the development agenda of many developing countries after
years of neglect, instigated by a complex set of reasons that included budgetary
constraints and criticism of the World Bank in the early 1990s on its direction and focus
(World Bank, 1991). A return of TVET to the development agenda is partly a reaction to
the emerging skills divide with the least developed countries falling further and further
behind, particularly in sub-Saharan Africa and South Asia (Maclean, et.al. 2011).
Currently, TVET is regarded to be important in the agenda to achieve relevant and
high-quality education for all, education for sustainable development and the
Millennium Development Goals whilst being part of the lifelong learning agenda (King,
2011). According to King (2012), there is a recent trend that the university graduates
enrolling at TVET institutions or community colleges to add occupation-specific
credentials mainly to their Bachelor of Arts degrees, which have not led them to real
employment. He emphasized that this trend, which is called reverse-transfer is
important and is quite likely to become even more pronounced in the future.

There is recent evidence to illustrate that TVET can play and essential role in
promoting sustainable poverty alleviation, human development and economic growth,
with clear benefits for individuals, their families, local communities, industries or firms
and societies in general (NORRAG, 2003; Maclean and Wilson, 2009). The World Bank
(2010: 1) emphasizes the importance of skills for individuals and economies as skills are
at the core of improving individual employment outcomes and increasing productivity
and growth of a country as a whole. UNESCOS strategy on TVET (2008) states that
more and more governments are calling for assistance in TVET development (UNESCO,
2011). Currently, Asian Development Bank (ADB) recognizes TVET as a priority area
within its program agenda in the Asia Pacific region (Maclean, 2011).


26

A growing number of research studies have illustrated that when the labor market is
expanding and training is closely linked to available jobs, financial returns on TVET in
developing countries could be higher than that of general education (Neuman &
Ziderman, 1991; Middleton et.al. 1993; Cox Edwards, 1994). Psacharopoulos and Velez
(1992) using Colombian data, found a strong positive relation between training and
years of formal education in determining earnings. They found that vocational training
really has an effect on earnings after a worker has eight years of formal education. A
study done on human resource development through vocational education in Saudi
Arabia also has pointed out some positive contribution of vocational education and
training, and more generally of the level of man power qualifications and skills, to firm
productivity and competitiveness. Furthermore, strong links have been found between
the human capital of the work place and its innovative capacity, as well as the adoption
and adaptation of new technologies, in the case of Saudi Arabia, which did not have
financial constraints in investing TVE (Mellahi, 2000). In a more macro level study,
Mingat and Tan (1988) found that such vocational training was particularly productive
when a countrys education system is highly developed.

It can be concluded that TVET is indeed important to developing countries but it must
be noted that the importance depends on the way that TVET is planned, offered,
monitored and assessed. A critical challenge that faces the South Asian region is the
development of a competent workforce for sustained economic growth in the global
economy. To meet the requirement for a skilled labor force, more emphasis has been
given to the TVET programs. This issue has been at the center of the policy agenda of
many national governments, particularly in the South Asian countries. Though
governments in these countries have paid much attention to the TVET sector in the
past few years, outcomes are still poor as correctly pointed out by Ul-Haq and Haq even
in 1998:
The vocational and technical education programs in South Asia are often
inadequate, irrelevant, and qualitatively poor. There is perhaps no other field
in education that required from South Asian policy-makers more fundamental
rethinking, sweeping reforms, and extensive change (p.96).
Furthermore, they say:
The system of vocational and technical education in South Asia is thus
characterized by low enrolment, high drop outs, poor quality of teachers,
inadequate access for women and rural population, limited private sector
involvement and very inadequate budgetary allocations. In other words,

27

technical training in South Asia is neither supporting a high economic growth
rate, nor expanding global markets, nor increasing employment opportunities.
The whole system requires fundamental review and restructuring. (Ul-Haq &
Haq, 1998: 100).

Thus the South Asian TVET systems are facing several challenges; quality of
institutions and lack of linkages between TVET providers and industries are two major
problems (Agrawal, 2013).

Human resource development through well planned education and vocational training
initiatives can contribute significantly to promoting the interests of youth, unemployed,
enterprises, economy and society within Sri Lanka. By helping individuals to gain
access to decent work and sustainable jobs, and escape poverty and marginalization
TVET can impact positively on the countrys economic development, achieving full
employment and promoting social inclusion. A well-structured TVET system will
enable productivity, enhance competitiveness and promote entrepreneural activity.
Therefore, I argue in a country like Sri Lanka, which maintains a developed education
system for more than six decades, if a correct TVET policy is implemented, if training is
closely linked to available job market by establishing linkages with industries and if
sufficient funds are invested in the system, definitely the financial returns on TVET
system will be increased. At this juncture, the government of Sri Lanka should learn
lessons from developed countries like Japan, Germany, Singapore and Australia to
develop the TVET sector to be responsive to the needs of the labor market and the
society.

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