Human Capital as a Catalyst in the Urbanization–Economic Growth Nexus: Evidence from Pakistan (1991-2022)

Abstract

The rapid expansion of urban populations worldwide has heightened the need for sustainable urban development strategies that can effectively support long-term economic growth. Consequently, scholarly interest in the urbanization–economic growth relationship has intensified, with emerging evidence suggesting that the growth implications of urbanization are not uniform but depend on the influence of key macroeconomic conditions. Despite Pakistan being among the fastest urbanizing economies globally, empirical research examining the urbanization–growth nexus remains limited, particularly with respect to the role of moderating macroeconomic factors. Against this backdrop, this study investigates the extent to which human capital development (HCD) conditions the relationship between urbanization and economic growth in Pakistan. Using annual time-series data covering the period from 1991 to 2022, the analysis employs the autoregressive distributed lag error correction model (ARDL–ECM) to estimate both short- and long-run dynamics. To ensure the robustness of the results, the dynamic ordinary least squares (DOLS) technique is also applied. The empirical findings indicate that urbanization, when considered in isolation, does not significantly enhance economic growth. However, the interaction between urbanization and human capital development yields a positive and statistically significant effect, implying that improvements in human capital offset the potential adverse consequences of rapid urban expansion. These results underscore the importance of integrating human capital investment into urban development strategies. Accordingly, the study recommends the formulation of urban policies aimed at fostering well-managed cities capable of leveraging agglomeration economies, alongside sustained investments in education and healthcare to strengthen human capital and promote inclusive urban-led economic growth.

Keywords: Urbanization, Economic growth, Mediating role, Human capital development, Education.