Questions for Chapter 6

Please give one reason for why consumption may be a better indicator of welfare than
income. (1.5 points)

- Consumption tends to be smoother and therefore better represent the lifetime

welfare of an individual/household than income. This makes consumption a better indicator of
welfare than income because if an economist takes a one-shot measure of consumption of an
individual, it’d be more likely for him to get a better idea of that person’s lifetime welfare than if
he took a one-shot measure of income. Consumption smoothing is made possible through
borrowing and saving.
- Another reason is that many under-developed countries still have a large agriculture
sector in which many households consume their own harvests. This self-supply is often not
counted as income, and therefore income would underestimate the welfare of those people.
- There is yet another reason. In some countries, especially in those countries in
disruption such as a civil war, markets don’t function and there’s very little to buy. So even if
people have high income, they can’t do anything about it, and their income has little to do with
their actual welfare.

b. Please give one reason for why we may want to care about inequality (and not just average
income) when we consider the economic and social conditions of the people in a country.

- Just by looking at average income, one cannot tell how well the people in each
segment, in particular the poorest segment, of the population are doing. One need to look at the
distribution of income. Even in the case where average income is high, if inequality is also very
high, it’s quite possible that the mass poor are doing very badly while the small segment of the
richest holds most of the total income in the country.
- Inequality can be a source of social conflict and resentment; possibly resulting in
crimes, violence, disruptions ... Rising inequality poses a threat to the stability of a nation. That’s
something to be concerned about. An average number such as average income is often not
informative enough.
The following income distribution data are for Brazil.
Quintile Percent Share
Lowest 20% 2.4%
Second quintile 5.7%
Third quintile 10.7%
Fourth quintile 18.6%
Highest 20% 62.6%

Brazil's total national income: $1 billion per day

Brazil's population: 150 million people
B.1 (B.1.a) (8 pts.) Graph the Lorenz curve from the Brazilian data given above,
carefully labeling the axes. On the axes, label all values that correspond to
the five points that make up the Lorenz curve.

y-axis values: 2.4, 8.1, 18.8, 37.4, 100

x-axis values: 20, 40, 60, 80, 100

(B.1.b) (3 pts.) Show how to find the Gini coefficient, graphically (do not actually
calculate it numerically).
See notes
(B.1.c) (6 pts.) Suppose that each household makes the average income for its
quintile (that is, assume that there is no inequality within quintiles). Using
a poverty line of $1 per day per capita, what is the headcount (i.e. the
measured number of poor people)? What is the average income shortfall
(AIS)?
2.4%($1 bil.)/20%(150 mil.) = $0.80 per day per person (1st quintile poor)
5.7%($1 bil.)/20%(150 mil.) = $1.90 per day per person (2nd not poor)
H = 20%(150 mil.) = 30 million, AIS = $1 - $0.80 = $0.20
(B.1.d) (3 pts.) Suppose one percent of total national income were transferred from
the highest-income quintile of households to the lowest-income quintile of
households. Assume no other changes in the economy. What is the
quantitative effect on the headcount?
 1st quintile's daily income per capita increases by 1%($1 bil.)/30 mil. =
$0.33, to $1.13. They are no longer poor, so H falls to 0.
B.2 (B.2.a) (3 pts.) Using the Brazilian data given above, what is the growth rate of
total national income if the highest-income quintile's income increases by
10%, and all other quintiles' incomes remain constant?
G = 62.6%(10%) = 6.26%
(B.2.b) (3 pts.) Using the Brazilian data given above, what is the growth rate of
total national income if the lowest-income quintile's income increases by
10%, and all other quintiles' incomes remain constant?
G = 2.4%(10%) = 0.24%
(B.2.c) (4 pts.) Referring to your answers to parts (a) and (b), briefly explain why
the growth rate of national income is not a very useful measure of social
welfare, even relative to other measures of social welfare that are just
aggregations of quintiles' income changes.
The answers to parts (a) and (b) show that a given percent change in a
quintile's income comprises a larger share of national income when that
quintile's level of income comprises a larger share of national income,
unsurprisingly. But from the standpoint of social welfare, there is no clear
reason why a 10% increase in high-income households' income is so much
more beneficial to society than a 10% increase in low-income households'
income, so the growth rate of national income is not a very good social
welfare measure.

Headcount index

 the great virtue of the headcount index is that it is simple to construct and easy to
understand

 adequate measure of assessing overall progress in reducing poverty (though preferably

always calculated for at least two poverty lines)

 Weakness: The headcount index does not take the intensity of poverty into account. To see
why, suppose that a poor person suddenly becomes very much poorer. What will happen to
measured poverty? Nothing. The headcount index is totally insensitive to differences in the
depth of poverty.
 The headcount index is very simple to construct and easy to understand.

 However, it does not indicate how poor the poor are, and hence does not change if people
below the poverty line become poorer.

 The poverty gap takes into account the degree of poverty, or the distance from the poverty
line. It is computed by multiplying the poverty headcount by the average distance from the
poverty line:

PG = H (z - yq) / z

where z is poverty line and yq is avg income of those below z

 The average poverty gap, APG = PG/N

 Table 2.1 provides two examples where H = 50%:

A: yq = [ (20 x 0.25) + (80 x 0.75) ] / 100 = 0.65

APG = 50%(1 – 0.65)/1 = 17.5%

B: yq = [ (40 x 0.25) + (40 x 0.75) ] / 100 = 0.35

APG = 50%(1 – 0.35)/1 = 32.5.5%

Country B’s poverty is more serious

 Unfortunately, detailed data on income distribution of individuals or households is often

unavailable.
True or False: Gini coefficients are a useful summary statistic for measuring income
inequality, but they don’t convey as much information as Lorenz curves.
A Lorenz curve is a plot of the percentage of income attributed to each percentile of the
population as we move up the income distribution. This is shown in the figure below. The
cumulative percentage of the recipients (from poor to rich) is shown on the x-axis (horizontal axis)
and the cumulative percentage of consumption or income they receive is measured on the y-axis
(vertical axis). The line that goes through a, b, c and d is the Lorenz curve. The more bowed out is
the Lorenz curve, the more unequal is the distribution of income. The diagonal 0B is the line of
perfect equality (the 45 degree line). The green shaded area is the area of inequality. If only one
individual or household received all the income, the curve would trace the lower and right-hand
borders of the diagram (0AB) and we would experience perfect inequality.

 The Gini coefficient is calculated by dividing the area of inequality of the Lorenz curve, by
the rectangular triangle formed by the diagonal (the line of equality) and the two axes.
 We can thus rewrite the above sentence as follows: Gini coefficient =


 (In other words, the Gini coefficient is the area shaded in green divided by the total of the
areas shaded in green and light blue.)
 The Gini coefficient can vary between 0 and 1. If incomes are distributed perfectly equally,
the Gini coefficient is 0 and the curve coincides with the line of perfect equality. If the total
income goes to 1 individual or household the Gini coefficient is 1 (and coincides with 0AB).
 Clearly, the Gini coefficient does not convey as much information as a Lorenz curve.
For example, if the Lorenz curves for two income distributions crossed, the Gini
coefficients could be the same, even though the distributions are different.
  Nevertheless, the Gini coefficient (which is a single number for each country) is more
useful for undertaking empirical work and for making comparisons amongst many
countries at once.

Discuss and critique some of the explanations that have been put forth to explain inequality.

 Kuznets was 1 of the 1st economists to speculate on the relationship between growth &
inequality, suggesting that inequality might 1st increase as a nation makes the transition
from a mostly agricultural economy to an industrial one. The underlying mechanism for this
rise in income inequality is the result of differences in the returns to FOP between
agriculture (where they are lower & less dispersed) & industry. When everyone works in
agriculture, income is distributed relatively equally, but as industrialisation & urbanisation
progress, inequality rises. As more FOP make the transition from farm to factory, inequality
may then start to fall.

 30-40 years ago it was observed that the poorest countries (Bangladesh, Congo, Papua New
Guinea, etc.) had a more equal distribution of income (probably because almost everyone
was poor), middle-income countries (Mexico, Brazil, etc.) had substantial middle- and upper-
classes along with large numbers of poor (greater inequality), and the most industrialised
countries (Sweden, Germany, etc.) had less inequality (because of widespread skills and
productivity, as well as more redistribution)
 This observation suggests that inequality might be inevitable through the process of
development – unless a country prefers to stay in poverty then it will have to suffer rising
inequality; this helped justify the attitude in the 1950s and 1960s in development economics
that rising inequality is not a concern
 Studies at this time were cross-sectional (they compared different countries at the same
point in time); if this cross-sectional data is predictive, then the trend of rising inequality
should be observed in time-series data (observing the same country over time)
 Other economists offered alternative explanations for an association between growth &
inequality. W. Arthur Lewis, developed a theoretical model that predicts rising inequality
followed by a “turning point”, which eventually leads to a decline in inequality.
 Employing a 2-sector model, the modern or industrial sector faces “unlimited supplies” of
labour as it is able to draw workers with low or even 0 marginal product from agriculture.
With wages held down by the elastic supply of workers, industrial growth is accompanied by
a rising share of profits. As average incomes rise, labour receives a smaller share of the
total, increasing inequality. The turning point is reached when all the surplus labour has
 been absorbed and the supply of labour becomes more inelastic. Wages and labour’s share
of income then start to rise & inequality falls.

 In Lewis’ surplus labour model, inequality isn’t just a necessary effect of economic growth; it
is a cause of growth.
• A distribution of income that favours high-income groups contributes to growth
because profit earners save to obtain funds for expanding their enterprises.
• The more income they receive, the more they invest. Their saving & investment
increase the economy’s productive capacity & thus bring about output growth.
• Not only does inequality contribute to growth according to Lewis, but attempts to
redistribute income prematurely run the risk that economic growth will be slowed.
 The ideas of Kuznets, Lewis & others about growth & inequality held considerable sway
among development economists for several decades. During the 1960s, a period of strong
growth in many regions, some economists wondered why growth wasn’t yielding more rapid
reductions in poverty. One idea was the relationship that came to be known as Kuznets
inverted-U, or the Kuznets curve.
 20 years after Kuznets’ original paper, researchers were armed with more data on inequality
& re-examined the relationship using primarily cross-section analyses of countries, including
many developing countries. A key assumption in this approach was that nations at different
levels of per capita income could approximate what individual nations might experience
over time as they achieved economic growth. Studies using this approach supported the
existence of the Kuznet curve. The tendency for inequality to rise & then fall with rising
levels of per capita income was maintained as a stylised fact about development until the
late 1980s. Subsequent research has overturned this perspective.
 Better & more abundant data on income inequality, especially time-series data on individual
countries, coupled with more rigorous econometric methods permitted researchers to
identify patterns over time within individual nations.
 One shouldn’t generalise from a few cases, so it is NB to look at the experience of larger
number of nations.
 Researchers who have done so find little evidence of a general tendency for income
inequality to 1st rise & then fall with economic growth.
 The persistence of a given level of inequality within nations may be the strongest trend.
 Support for the Kuznets curve in earlier cross-section analysis was driven by the higher
inequality of a subset of middle-income nations.
 Better econometric tests reveal that the inverted-U was driven NOT BY ECONOMIC
GROWTH, BUT BY THE COINCIDENCE OF LATIN AMERICA’S HIGH INCOME LEVELS OF
INEQUALITY & MIDDLE-INCOME RANKING!
 Investigation of the Kuznets curve offers a cautionary tale for empirical work on developing
nations. Patterns observed across nations may not always provide reliable insight into what
ultimately are dynamic processes that occur within nations.
 Rejection of the Kuznets as an overall tendency
 doesn’t imply that economic growth has no impact on inequality,
 nor does it deny that something like the Kuznets curve might occur in some countries.
 The lack of 1 general pattern simply confirms the complexity of the process that determines
inequality.
 Research on the Kuznets curve identifies the large role played by country- or region specific
circumstances, which appear far more NB in determining distributional outcomes than the
level of per capita income.
 This is an encouraging finding. That all nations don’t follow a similar distributional path
suggests that there may be greater scope for government policy to influence the
distributional outcomes that accompany economic growth.
Other causes
 If inequality isn’t systematically associated with the level of income, what else accounts for
the observed differences across countries & regions?
 There is little doubt that history & politics have played an NB role.
• An obvious example is SA, which has 1 of the world’s highest levels of income
inequality. For decades, the apartheid government excluded blacks and other non-
white South Africans from owning prime agricultural land, getting a decent
education & living in major urban areas. The legacy of these policies remains today,
reflected in South Africa’s highly unequal distribution of income.
• History & politics also played key roles in other parts of world. At the end of WW2,
the U.S.A administered a land reform in South Korea as part of the dissolution of 50
years of Japanese colonial rule. These reforms redistributed land from Japanese to
Korean households, providing millions of Korean families with a key asset from
which they could earn a living, resulting in a relatively equal distribution of rural
incomes.
 There is little doubt that history & politics have played an NB role.
• Low levels of inequality in eastern Europe & central Asia are, in part, the product of
years of legislated wags & state ownership of the FOP. Citizens of these countries
had limited opportunity to accumulate any productive assets other than an
education. It isn’t surprising that, with the turn toward the market, inequality is now
rising in many of these countries; in some of them this is happening alongside
renewed economic growth.
• Some of the high levels of inequality in Latin America may be traced to patterns of
land ownership dating back centuries. Not only was the colonial legacy part of this
process but the demands of specific crops, including the advantages of plantation
style agriculture, were also a factor. In East Asia, rice cultivation was better suited to
family farming & established a basis for higher income equality in this region.
Conversely, mineral wealth, tends to produce higher inequality.
 FACTOR ENDOWMENTS SHAPED DISTRIBUTIONAL OUTCOMES IN THE PAST
& CONTINUE TO DO SO TODAY.
 Resource endowments & the “persistence of the past” play significant roles in shaping a
nation’s distribution of income, but policy choices made today also affect these outcomes.
• Government policy influences the accumulation of assets, including education.
• Policy decisions affect the diffusion of technology & access to markets, which
condition productivity growth & the returns to FOP.
• Taxes & government spending, including expenditures on social safety nets, directly
influence how income is divided.
  The level of inequality in any nation is the result of complex interactions among
• history,
• politics,
• resource endowments,
• market forces &
• government policies.

Explain why inequality matters.

 If economic development requires a reduction in the amt of poverty, then the simplest
explanation for why income inequality matters is that the degree of inequality + the level
of income determines the extent of poverty.
 E.g.
• If an economy grows & inequality remains unchanged, the income of the poor has
grown in line with everyone else’s. The poorest quintiles have more income, which
potentially helps raise some households out of poverty.
• But, if per capita income remains unchanged & inequality rises, the poorest quintiles
have less income & some households probably have fallen into poverty.
 But, inequality & growth are not determined independently of 1 another. There may not be
1 systematic tendency for how inequality changes as nations growth, but inequality often
changes with rising per capita incomes. Similarly, inequality may affect the rate of growth
an economy achieves. (An aside: Do nations with more inequality tend to experience slower
growth, thus doubly hurting the well-being of the poor?)
 Finally, income inequality also matter in its own right. Societies have preferences
concerning inequality & may (or may not) wish for their governments to intervene to
achieve distributional outcomes.
 Just as there has been a long debate over the impact of growth on inequality, there is
ongoing debate over how inequality affects economic growth.
 As discussed previously, some early theories of economic development concluded that
inequality might raise growth rates. By concentrating income in fewer hands, there might
be more savings available to finance investments critical for capital accumulation. But this
simple view of distribution & growth fails to capture other channels in which income
inequality can be a drag on economic growth. Contemporary discussion of the
relationship between inequality & growth explores these channels.
 When inequality is high, worthwhile investments may not be undertaken. Poor people
may have promising investment opportunities (e.g. investing in a piece of equipment or
sending a child to school). But, the individuals or families may not undertake these
investments because they can’t afford them. Credit market imperfections & the inability of
the poor to offer lenders collateral lowers the amount of productive investment they engage
in & leads to less economic growth. If the economy had a more equal income distribution,
more of these productive investments could be financed & pursued.
 Another channel that links inequality & growth is the political process.
• Some argue that, when inequality is high, the rich use their wealth to secure
outcomes favourable to their interests, influencing everything from government
spending (e.g. disproportionate amounts spent on public universities which their
children attend) to trade policy (using tariffs & other forms of trade protection to
maintain domestic monopolies.) These policies can lead to inefficient outcomes that
lower growth rates.
• Others argue the opposite political response occurs. When inequality is high,
populist movements may arise that focus more on redistribution & less on growth,
leading, e.g., to higher taxes & less investment. High inequality also tends to be
associated with more violence, both personal & political, which in turn can
 reallocate expenditures to less productive activities (more police) & discourage
greater investment.
 Given the multitude of connections between inequality & growth, the net effect is an
empirical matter.
 Early studies found statistical support that high initial inequality, especially of landholdings,
was associated with slower subsequent growth.
 But later studies, using larger data sets & different econometric techniques, either found no
such effect or even an opposing one.
 The inconclusive nature of these results is not surprising, given both the complexity &
potential circularity of the relationship (inequality affects growth & growth affects
inequality). It is also unlikely that 1 systematic pattern describes the relationship between
inequality & growth for all countries at all times. This doesn’t imply that, in a specific-
country context, inequality & growth are unrelated. High inequality may be a constraint
on growth, but easing this constraint is always a daunting challenge for policy makers.

The number of people in abject poverty in the world has fallen dramatically over
the past forty years. (a) What regions are primarily driving this development and
why? (b) What regions are making least progress and why? (c) Is there a process of
“convergence” among the rich and poor that is being driven by globalization?
What are the principal economic characteristics of poverty groups? What do these
characteristics tell us about the possible nature of a poverty-focused development
strategy? What strategies may be used to reduce poverty? Ensure that you include a
discussion of why certain people disagree with the strategies that you will have
mentioned in your previous answer.

 According to the World Bank’s estimates for 2005, nearly 3 out of every 4 Africans & South
Asians lived below the $2-a-day poverty line.
 But, who are the poor? Even though the majority of Africans & South Asian populations live
in conditions that qualify as poverty, some live well below the poverty line & are poorer than
others. There are defining characteristics of extreme poverty.
 Rural poverty, in terms of absolute no. & rates, tends to be higher than urban
poverty. This may come as a surprise to the casual observer who contrast the image of
rural villages, with their open spaces & often picturesque arrangements of straw huts & basic
dwelling with the urban squalor & densely settled & seeming disorganisation in the squatter
camps common to large cities in low & middle-income nations.
 What the casual observer fails to see are the lack of opportunities in rural areas.
There are fewer ways to earn income, less education & healthcare, & often more
vulnerability to the weather & forces of nature. Within rural areas, poverty often
is most common among landless casual labourers or, in sub-Saharan Africa,
among pastoralists. Individuals often choose to leave the countryside for the slums of the
city because there are more economic opportunities in urban areas.
 In addition to the rural-urban divide, poverty rates vary by regions within countries.
The persistence of regional poverty reflects both the limits of spreading development from 1
region to another & the constraints individuals may face in escaping poverty by migrating
from 1 region to another.
 Poverty also has a racial & ethnic face. Scheduled castes in India, certain ethnic
minorities in eastern Europe including Roma, & indigenous groups in the Andean region all
experience poverty rates in excess of others in their societies.
 Looking at poverty from the perspective of gender requires consideration of intra-
household distribution, the sharing of resources within family units. Most studies
of gender roles & opportunities in developing & developed countries conclude that
women are disadvantaged relative to men along many dimensions.
 Women have less access to property rights, including ownership of land, & often are denied
inheritance. Girls have tended to receive less primary & secondary education than boys,
 although in many countries & regions this is no longer the case. Labour markets tend to
discriminate against women, paying them less than men for the same work. Combining the
work done at home with that done for income, women tend to work many more hours per
week. Domestic violence against women is all too common. Sex-selective abortion favours
the birth of boys over girls in many parts of the world.
 Given all these disadvantages, the feminisation of poverty seems straightforward,
but it isn’t.
 Measures of individual consumption are based on household data, & it is difficult to
disentangle who consumes what within the family. Some goods, including housing, are
jointly consumed. Given the lack of data on individual consumption by gender, some studies
compare poverty rates between households headed by men & women. The results are
inconclusive.
 Some categories of women-headed households do quite poorly. E.g., widows
without male heirs in India & elderly women on pensions in eastern Europe have
particularly high poverty rates.
 But other women-headed households, including unmarried women working in
urban areas & married women with households working abroad & sending
remittances, may experience lower-than-average poverty rates.
 Studies of nutrition that assess the degree to which the needs of females vs males are met
find some evidence of the relative deprivation of females but the results vary widely across
regions of the world & even within countries.
 Despite the lack of evidence on the feminisation of poverty, it is hard to imagine that
reducing gender inequality would not also help reduce poverty in general.

Strategies to reduce poverty:

 The World Bank’s 1990 World Development Report not only provided an estimate of the
amt of world poverty but also outlined a strategy for alleviating it.
 The strategy had 2 main elements:
• Promote market-orientated economic growth
• Direct basic health & education services to the poor.
 Market-orientated growth included macroeconomic stability, greater economic openness
to trade & investment, increased public investment in infrastructure, improved credit
markets, etc.
• Combined these policies would lead to labour-demanding growth, which would
benefit the poor because the primary asset the poor rely on is their labour.
 The 2 element of the strategy called for investing in people. Directing government health
nd

& education services to the poor would increase their productivity & thereby contribute to
poverty reduction.
 A 3rd but less emphasised part of the strategy was to develop social safety nets to assist
individuals unable to take advantage of market opportunities.
 Most strategies for reducing poverty call for increasing the rate of overall economic growth,
because the poor are expected to benefit from economic growth along with the rest of the
population.
• But, there are dissenting voices. In 1996, the UNDP wrote in that year’s Human
Development Report, “Policy-makers are often mesmerised by the quantity of
growth. They need to be more concerned with its structure & quality”.
 The report goes on to specify problems with economic growth:
• Jobless: where the overall economy growth but doesn’t expand opportunities for
employment
• Ruthless: where the fruits of economic growth mostly benefit the rich, leaving
millions of people struggling in ever-deepening poverty
• Voiceless: where growth in the economy hasn’t been accompanied by an extension
of democracy or empowerment
• Rootless: which causes people’s cultural identity to wither
 • Futureless: where the present generation squanders resources needed by future
generations
 The UNDP report raises many concerns. One of them is to question whether (or at least how
often) economic growth is good for the poor or whether the benefits are more likely to be
concentrated on the rich. The basic mathematics of growth, distribution & poverty suggests
that, generally, growth should be good for the poor. Earlier it was shown that inequality
doesn’t systematically increase with economic growth. This implies that in most cases
growth should benefit the poor just as it benefits others in a society. As long as GDP grows
faster than the population, average incomes within each quintile usually also increase.
Numerous studies support this conclusion.

Questions for Chapter 8

If a nation has 900 000 people enrolled in school in the academic year 2005/06, and the total
number of school-age individuals is 1 000 000 calculate the gross enrolment rate.
Furthermore, define the gross enrolment rate. Explain how it can be possible to have a
gross enrolment rate of greater than 100%. Why is a gross enrolment rate of greater than
100% a “mixed blessing” so that one need to be careful in considering it when evaluating
the state of education in a country?

Example
For example, if a nation has 900 000 people enrolled in school in the academic year 2005/06,
this number is divided by the total number of school-age individuals. Suppose this number is 1
000 000. This means 90 percent of the people are enrolled; or that 90 percent is the Gross
Enrolment Ratio of that nation.

GER = number of actual students enrolled / number of potential students enrolled

=
=
Definition: The GER refers to the total number of children enrolled in a given school
category divided by the number of children of the age group that officially corresponds to
that level of schooling.
The GER at a certain level of education can be >100% if there are students that are of ages
outside the age range appropriate for that level but that are enrolled in level. These
students could be highly endowed ones that take classes ahead of their age, or those that are
past the appropriate age range because they had to miss school when they were younger, or
dropped out for some reason and are now re-enrolled (which is more likely to be the case
especially in less developed countries). Finally, the GER can be greater than 100% as a
result of grade repetition.
Therefore, although a GER > 100% tells us that a lot of people are going to school, the bad
news is that GERs > 100% usually imply that many children are repeating grades. If
repetition rates are high, as they often are in poor countries, GERs can be high even though
a substantial number of children never attend school.
Below is a graph (figure 8-4) of the relationship between education and earnings for men in
Nicaragua in 1998. What does the graph suggest about the long-term effect of education on
inequality?

People with different levels of education start out with some gap between them. This gap
increases over the lifetime of an individual, indicating increased inequality. Another way to
look at the graph is to notice that the slopes of the earnings lines for higher levels of
education are larger than the slopes for lower levels of education, suggesting that the long-
term increase in gains from education is higher for those with high education than for those
with low education. Therefore, inequality tends to increase over the long term.

Provide an outline on the trends and patterns in education over the last forty years, across
countries at different income levels.

 Worldwide, gross enrolment rates (total no. of children enrolled in a given school
category divided by the no. of children of the age group that officially corresponds
to that level of schooling) in any type of tertiary education (schooling beyond high
school) amount to about 1 out of every 4 members of your age group.

• In the high-income countries, the rate >67% in 2008

• In middle-income nations, it reached 25% &

• In low-income countries, it was only 7.5%.

 The experience of the current university age cohort, as compared to the schooling
experience of earlier generations, tells us a lot about the stocks & flows of education
in the world today.

• Stocks refer to the amount of schooling embodied in a population

• Flows refer to the net change in those stocks as the result of the school
enrolment patterns.

 The scarcity of education in the developing nations is evident in the data on the levels
of schooling completed among today’s adult population. In the U.S., an advanced
economy, only 3% of adults didn’t complete 6 years of schooling (i.e., didn’t complete
primary school).

 The situation in low- & middle-income nations couldn’t be more different. In Brazil
about 1 out of every 4 adults didn’t attend or complete primary school. In Thailand
almost 1 out of every 2 adults didn’t attend or complete primary school. Household
data from 2 Indian states tell a similar story. By the late 1990s the states of Uttar
Pradesh & Bihar were among the poorest states in India & hence among the poorest
people in the world. Over 2/3 of their adult population didn’t complete primary
school, most of them having never attended school.

 Minimal levels of education characterise today’s labour force in many low- &
middle-income countries, but the situation is changing. Throughout the world,
parents & governments, as well as bilateral donors & international agencies, are
advocating that current & future generations receive more schooling. This trend is
evident in a comparison of school enrolment rates by region over the past 3 decades

 At the primary school level, gross enrolment rates either have been high for decades
(East Asia, Europe & central Asia, Latin America) or have expanded rapidly (Middle
East & North Africa, South Asia & sub-Saharan Africa). Consistent with the MDG on
achieving universal primary education, regional trends indicate real progress in
increasing the amount of schooling children receive. But there is more progress to
be made; in 2008, close to 70 million children were not in school.

 In the case of primary school, the relevant age group usually is 6 – 11 years old. If
older children (or younger children) enrol in primary school, the gross enrolment ratio
can be greater than 100, as it does in several regions. Gross enrolment ratios that are
greater than 100 are often a mixed blessing.

 The good news is that they indicate lots of children are enrolled in school.

 The bad news is that they usually imply that many children are repeating grades. If
repetition rates are high, as they often are in poor countries, gross enrolment rates
can be high even though a substantial no. of children never attend school.

 Alternative measures of school attendance take account of this problem.

 Net enrolment rates (NER) refer to enrolments of only those of the relevant age
group.

 Grade survival rates estimate how many children actually complete a certain grade
level.

 Estimates of these measures confirm the substantial progress nations have made in
expanding primary education but also highlight that universal completion of primary
school remains a challenge.

 In 2008, NER in low- & middle-income countries were 81 & 88%, respectively. In sub-
Saharan Africa they were 75%. Estimates of grade survival rates suggest that 1 out of
5 children in some of the poorest nations didn’t complete 5 years of schooling. In
some middle-income nations more than 1 in 10 failed to do so. These failures are
most pronounced among the poorest children, those with families in the bottom
quintile of the income distribution. Because of these tendencies, the MDG of
achieving universal primary education for all children by 2015 is unlikely to be met.

 Achieving universal primary education remains an NB goal. Another challenge is to

expand secondary & tertiary enrolments. Huge enrolment gains in secondary
education have been realised in virtually all regions. Latin America’s gains are the
greatest. The poorest regions, sub-Saharan Africa & South Asia, still lag the other
regions, but much progress has been made in 30 years.

 It is not surprising that both the absolute level & expansion of tertiary enrolments
remain low in almost all developing regions relative to the high income group. Faced
with limited resources, governments must decide whether to allocate additional
resources to achieving universal primary education or to expanding opportunities at
either the secondary or tertiary levels.

 Trends in school enrolment rates across regions, combined with the age structure of
today’s developing world, tell us how human capital endowments will change in the
decades ahead. Subsequent generations will be more numerous & have more
schooling than their parents. This trend is already evident.

 Average years of schooling have gone up everywhere. What is striking about these
numbers is the extent of this increase. E.g., the educational attainment of the
potential workforce in East Asia has gone from a predicted mean of 4.4 years to 7.4
years of schooling. The average level of educational attainment may still seem low,
especially relative to the high income countries (11 years in 2010), but remember
these estimates are population means.

 In the developing nations, people in their 50s & 60s with little or no schooling are
averaged together with people in their 20s & 30s whose educational attainment > the
mean. The trend is unmistakable, younger workers are entering the labour force
with more years of schooling & are enriching the human capital of the developing
countries.
  The MDGs called for eliminating gender disparity in primary & secondary education by
2005 & by all levels by 2015.

 Progress has been achieved not only in the no. of years of schooling received but
also in the distribution of who receives this schooling.

 There has been considerable progress in spreading the opportunity to attend school
to girls as well as boys, although girls’ education still lags.

 Estimates of average years of schooling for men & women >15 reveal a gender gap
that has declined significantly over time.

 For all developing nations, the mean no. of years of schooling for men in 1960 was
only 3.1 years & for women 2.0 years. Taking the ratio of the two, women completed
only 62% the schooling of men. For the developing world as a whole in 2010, women
were estimated to have completed an average of 6.5 years of schooling as compared
to 7.6 years for adult men, meaning a gender ratio of 86%.

 Regional patterns show considerable variation (Table 8-2) around these trends. All
regions have narrowed the gender gap in schooling, with Europe & central Asia &
Latin America having almost achieved gender parity. South Asia, by comparison, has a
long way to go.

 Estimates for 1980 show that adult women in South Asia had received virtually no
schooling (0.9 years), only 1/3 of what adult men received (2.8 years). By 2010
outcomes had improved. Women averaged 3.4 years of schooling, now about 60% of
what men completed. South Asia’s gender gap is expected to continue to narrow.

 Today in South Asia, gross primary school enrolment rates for boys & girls both
>100%, with the rate for girls equal to 95% those of boys; the secondary school
enrolment rate is 56% for boys & 48% for girls.

 When these young people move on to replace their parents & grandparents in the
labour force, the region’s stock of human capital will be larger & its distribution
between men & women more equal.

Distinguish carefully between private and social benefits and costs of education. What
economic factors give rise to the wide divergence between private and social benefit-
to-cost valuations in most developing countries? Explain your answer. (Note: No
diagrams are required.)

Social costs of education: the opportunity cost to society as a whole resulting

from the need to finance costly educational expansion at higher levels when these
limited funds might be more productively used in other sectors of the economy
(increase rapidly as students climb the educational adder) (½ mark)
Social benefits of education: the payoff to society as a whole (these payoffs for
all levels of schooling fall short of the private benefits) (½ mark)
 Private costs: borne by students themselves (costs increase more slowly than
social costs (½ mark)
Private benefits: future earning of higher income through modern sector
employment (½ mark)

 Private returns and Costs

As a student completes more and more years of schooling, her expected private
returns grow at a much faster rate than her private costs (½ mark), because
policies in both the private and public sector favour those who have more years of
schooling (½ mark). To maximise the difference between expected benefits and
costs the optimal strategy for a student would be to secure as much schooling as
possible (1 mark).
 Social Returns and Costs
The social benefits curve rises sharply at first (½ mark), reflecting the improved
levels of productivity of, say, small farmers that result from receipt of basic
education and the attainment of literacy, arithmetic skills, and elementary
vocational skills (½ mark). Thereafter, the marginal social benefit of additional
years of schooling rises more slowly (½ mark), and the social returns curve begins
to level off (½ mark). By contrast, the social cost curve shows slow rate of growth
for early years of schooling (½ mark) and then a much more rapid growth for higher
levels of education (½ mark). This rapid increase in marginal social cost is a result
of much more expensive higher education (most of the higher education is heavily
subsidised in developing countries) (1 mark).

Summarise the main features of the human capital model. Explain the difference between
private returns to education and public (or social) returns to education. Discuss the problem
of “ability bias” in measuring the causal effect of education on earnings.

On average, people with more schooling earn more than people will less schooling.

 Typically,

• primary school graduates earn more than those with no schooling;

• secondary school graduates earn more than primary school graduates;

• those with tertiary education can command a higher salary than their
counterparts with less education (there are exceptions)

• The relationship holds for both men & women, it holds in fast growing
economies & stagnant ones, & it holds across income levels & regions.

 If Figure 8-4 were reproduced for any country the results would be similar:

 People with more years of schooling tend to earn more than people with fewer years.

 This suggests thinking about education as an investment.

 Recall: Economists define investment as the flow of resources into the production of
new capital.

 In the case of schooling, resources by both governments & households are spent in the
expectation that schooling produces human capital.

 The expectation is also that these investments will yield a positive return.

 By attending school, an individual hopes to acquire human capital, which makes that
individual more productive &, therefore, better compensated.

 Benefit to thinking of education as an investment as schooling competes with many

other activities on which governments & households spend their scarce resources.

 Figure 8-5 illustrates the factors that determine the private return to schooling.

 The figure represents 2 stylised streams of future earnings, 1 if the individuals complete
only primary school & the other if they complete a secondary education. All
individuals are assumed to complete primary school at age 11. If they don’t continue
with their education, they begin to work & follow the earnings profile marked as
primary education.

 Alternatively, individuals might complete secondary education & remain in school until
age 18. For ease of explanation, we assume that individuals don’t work while in
school &, therefore, have 0 earnings while in school. Once secondary school is
completed, these individuals follow the higher of the 2 earnings profiles. The private
pecuniary (monetary) benefits of a secondary education are the earnings the
individual expects to receive beyond what he/she would have earned with only a
primary school education.

 But, costs also are associated with the decision to remain in school. These costs include
any foregone earnings, sacrificed because an individual is in school & not working.

 These costs may seem low for a young person considering attending primary or
secondary school. But for the majority of households in the developing nations, the
opportunity costs of sending a child to school are real

 In rural H/H, e.g., children work in the fields, or watch siblings permitting others,
including adults, to be engaged in farming & other productive activities.

 In addition to foregone earnings, H/H face direct costs in sending a child to school.
These costs may include school or uniform fees, payments for book & other materials,
transportation costs, or other “unofficial” fees to ensure a child gets the attention of
a teacher. Although these sums may seem small, to a poor family them may be
overwhelming.

 To think of education as an investment, we need a systematic way to compare the costs

of benefits of schooling shown in Figure 8-5. Economists argue that 1 can’t simply
 add up the costs & compare them to the benefits because money received in the
future is worth less than money that can be spent today.

 Such positive time preference is the result of both uncertainty about the future & the
opportunity cost of resources – namely, the returns an alternative investment might
yield

 Future benefits need to be discounted to compare them to current costs. 1 way of

doing so is to calculate the present value (PV) of all costs & benefits.

 There are several ways 1 can then determine whether a particular investment is
worthwhile. In the analysis of education, a common way is to estimate an internal
rate of return for the investment.

 The internal rate of return is a derived interest rate, “r”, which equates PVB to PVC.

 The analysis of cost can be done on both a private and social basis (a social analysis
would include costs not borne directly by the family, such as government
expenditure, that are not considered in a private analysis)

 To determine whether to invest in more education, the family will compare the present
values of the benefits and costs:

 If the present value of the costs is greater than the present value of the benefits, then
the family will not invest in additional education

 If the present value of the benefits is greater than the present value of the costs, then
the family could invest in additional education (although there could be other
investments with higher returns – they should use the IRR method to determine if
additional education is the best investment):

 The internal rate of return:

 Suppose at an interest rate, i = 12%, the net present value of the benefits is less than
the net present value of the costs, but at i = 7% the net present value of the benefits
is greater than the net present value of the costs – why is the NPV of the benefits less
than the NPV of the costs at higher interest rates?

 This occurs because costs are usually incurred during the early years and are discounted
very little, but the benefits are spread out over many years and are heavily discounted

 At high interest rates, present costs are not justified by benefits in the future; however,
there is an interest rate low enough so that the NPV of the costs is less than the NPV
of the benefits

 The cut-off interest rate at which the NPV of the costs and the NPV of the benefits are
equal is called the internal rate of return (IRR); if the IRR is greater than the interest
rate, then the NPV of the benefits is greater than the NPV of the costs, but if the IRR
 is less than the interest rate, then the NPV of the benefits is less than the NPV of the
costs

 The internal rate of return is found by setting the present value of the costs and the
present value of the benefits of additional education equal to each other and
replacing the interest rate, i, with the internal rate of return, r (page 289, equation 8-
3):

 Schooling represents not only a private investment, it also is a social one. We can
therefore define a social return to schooling.

 On the cost side, schooling entails more than the foregone earnings of the individual &
the payments of households. Primary school is “free” in most parts of the world, yet
someone pays for teachers, the construction of schools, etc. When evaluating
education as an investment from society’s perspective, these costs must be taken into
consideration. The social return includes ALL the costs entailed in the provision of
schooling.

 On the benefits side, schooling benefits the individual through higher earnings, but
schooling may also produce a positive externality (benefits that accrue to members
of society above & beyond the benefits to the individual who receives the education).
Potential positive externalities include health spillovers (the children of educated
mothers tend to be healthier, which benefits children in other families because it
reduces the transmission rate of certain diseases, reductions in crime, & more-
informed political participation & decisions. More schooling, especially higher
education, may also lead to technological progress that isn’t fully captured by private
returns

 Ability bias: If individuals who have more years of schooling earn more than those with
fewer, how do we know schooling caused the higher earnings? Perhaps people who
are innately more talented both earn more & receive more schooling. Is the increase
in earnings a result of their schooling or their innate abilities? If we don’t control for
innate ability – something that isn’t easy to measure-& for many other variables that
might influence future earnings, how can we be certain that our estimates of the rate
of return to schooling are correct?

Does empirical evidence on the rates of return to education show that LDCs should put

a priority on primary education relative to secondary and university education? Would

you expect the relative returns to primary education, on the one hand, and secondary
and tertiary education, on the other hand, to change as economic development takes

place?

Economists who analyse the relative rates of returns to investment to primary education

and secondary education in LDCs disagree on whether LDCs should put greater

priority on primary education.

Psacharopoulos and Patrinos, who find that the higher average returns are from primary

education, argue for more emphasis on primary education.

Knight, Sabot, and Hovey, however, question this emphasis in a study that shows that

the marginal rates of returns to the cohort entering into the labour market were lower

for primary education.

Furthermore, Psacharopoulos and Patrinos’ study don’t take account of any (difficult to

measure) positive externalities associated with different levels of education. If a nation

has a chronic shortage of trained professionals in e.g., medicine, developing such skills

may yield a large social return.

It has also been argued that the reason put forward advocating that more resources

should be devoted to lower rather than higher levels of schooling is reminiscent of the

colonial era, when education of native populations was suppressed, leaving many

nations with a miniscule no. of educated citizens at the time of independence.

Another reason that has been used to advocate further studies is that modernisation

means having the things advanced nations have, including universities & the graduates

they produce.

Obviously more research is needed here.

 As development proceeds, you would expect that returns for higher education would

increase.

What are some of the ways that a less-developed country (LDC) can increase its rate of
returns to investment in secondary and higher education? (not in your textbook, but you
must know) (6)

One possible approach to reduce the cost of training skilled people is to use more career in-
service or on-the-job training (1 mark). But, the most effective way would probably be to pay
less of the expenses for higher education (1 mark). Most LDCs subsidise higher education
almost in its entirety (½ mark). Reallocating these expenditures elsewhere would be wise (½
mark). Students should be charged tuition and other fees to cover the costs of their education
(½ mark), as its individual rewards are large (½ mark).

Another way would be to assist women more (½ mark), since there is some evidence that
returns to education of women are higher (½ mark). (A number of studies indicate that
educating girls has a high payoff in improving nutrition (½ mark), reducing fertility (½ mark), and
child mortality (½ mark), and increasing labour force productivity (½ mark).) Furthermore, it
may also be possible to simply reduce the number of university specialisations (½ mark), relying
instead on foreign universities for specialised training in fields where few students and
expensive equipment leads to excessive cost per person (½ mark). Finally, distance learning
through teleconferencing and computers can dramatically reduce the cost of continuing
education and secondary and higher education, including teacher training (1 mark).

1. Explain how women’s education contributes in breaking the vicious circle of poverty
in developing countries.

A good answer needs to mention empirical evidence and facts and discuss the role of women 1) as a
source of skills/labour and 2) as a determinant of fertility and children’s welfare, and how women’s
education impacts on these and, ultimately, poverty.

 There has been a considerable increase in gender inequality in education in low

income countries over the last three decades.
 Accumulated evidence that low level of education for women is associated with lower
economic development and higher social inequality.
 Recent evidence from Africa suggests that poverty contribute in gender inequality in
access to education
 In emerging economies women constitute an important source of skills in rapidly
expanding communication, manufacturing, and computer services.
 Higher education for women provide non-agricultural job opportunities for women
 By contribution to better child health and higher level of child education, women’s
education contributes in breaking the vicious circle of poverty
 Increased schooling of females affects women’s willing and ability to enter the labour
market increases their earnings.
 Increased schooling of females changes attitudes towards women’s traditional role
 Increased schooling of females improves human development outcomes such as child
survival, health and schooling
 Increased schooling of females reduces fertility, infant mortality and increases
children's education

Discuss measures that may be put into place to make schooling more productive.

 High dropout rates, as well as low & even declining school enrolment rates (the latter occurred
throughout sub-Saharan Africa during the 1990s), may have as much to do with

• low returns in the labour mkt

• as with a family’s resource constraints

• or problems with the schools themselves.

 Students & their families may decide that the benefits of schooling don’t justify the costs. &
in many instances they may be right. The provision of schooling is no guarantee that getting
an education will yield a high return. Problems with labour demand highlight that schooling
is not a panacea; it is not the one solution to problems of poverty & economic backwardness.

 But, problems on the demand side don’t imply that the supply of education is without
problems.

 In many countries schooling is not doing as much as it can to promote development.

 Reasons

• Underinvestment in schooling overall

• Governments misallocate resources across different levels of schooling

• Systematic inefficiencies in the use of resources within schools

 These issues will be explored in more detail in the coming paragraphs.

Underinvestment

Despite attractive economic returns & other benefits to schooling, many developing countries spend
too little on educating their children. Determining the right amount that should be spent is no simple
matter. First estimates of rates of return are imprecise at best. Second, spending more money on
schooling is no guarantee that the money will be well spent & produce better education outcomes.
However, it is believed that to the extent that countries that have a high dependency burden of young
people should devote a larger share of GDP to schooling because those expenditures must be spread
among a large number of students.

 It should be noted that there are many explanations for why nations may underinvest in
schooling.

• One is that in a fiscal crisis the 1st casualties usually are education & the social sector
in general.

- Economic downturns & negative growth rates have impacts on education

spending & can result in an entire cohort of children getting less schooling
than would have been the case in a more stable economy.

- Protecting schooling & the other social sectors is a major challenge nations
face whenever government revenues start to fall.

Misallocation

Misallocation of resources between different levels of schooling refers to government decisions on

how much to spend on primary, secondary, and tertiary levels. Research indicates that the social
returns are highest for primary school followed by secondary and then tertiary schooling. These
results are not surprising if one considers that the direct costs of tertiary schooling per student is much
higher than the per student costs of either primary or secondary education. Because the government
often pays for all or most of these costs, social returns to higher education are going to be significantly
less than are private returns. This, in turn, suggests that governments should initially allocate more
resources to primary schools. Once universal primary education is achieved, more resources should
be devoted to secondary schools. According to this logic, tertiary education should have the lowest
priority.

Such conclusions encounter much opposition. First, the estimates of social rates of return quoted by
researchers fails to take account of any positive externalities associated with the different levels of
education. 2nd, the argument that more resources should be devoted to lower rather than higher
levels of schooling is reminiscent of the colonial era, when education of native populations was
suppressed, leaving many nations with a minuscule number of educated citizens at the time of
independence.

(The theoretical rule that governments should follow is really more subtle. Governments should
allocate resources to equate the marginal rate of return on its investment.)

Improving schools

 In addition to spending more on schooling overall & reallocating some expenditures between
levels, the use of resources within schools needs to be improved.

 In some instances the solutions to these problems require:

 • more financial resources

• spending available resources better

• In others, the problems are less about resources & more about holding teachers &
principals accountable for their actions.

 Inefficient use of resources & lack of accountability within schools aren’t new issues. But
recent research has given new insight into these long-standing concerns. Especially NB are
the use of randomised controlled trials (RCTs), also referred to as randomised evaluations.
Research organisations like the Abdul Latief Jameel Poverty Action Lab (J-PAL) at MIT are
pioneering the use of experiments in the field to learn more about what works in schooling,
health, microcredit & other areas.

Reducing the cost

 Recall: 20% of children in low-income countries don’t complete even 4 years of schooling.

 One reason why children may not be in school is because there is no conveniently located
school to attend – think rural areas.

 However, research findings suggest lack of attendance is much more often a problem of
household demand than of school supply.

 On demand side – households don’t send their children to school (including primary school)
because poor families can’t afford the fees required for school attendance. These fees can
include:

• User charges to attend school

• Fees to pay for textbooks

• Mandatory school uniforms (e.g., Kenya where a uniform costs $6 & 1/5 of the
population lives below the $1.25-a-day poverty line)

 Increase attendance by:

• Eliminating school fees

 But, it comes at a cost. By eliminating fees, the government loses much

needed revenue to pay for teachers & other school needs. Financing
schooling now requires new revenues or reallocating funds from some other
use.

 The critical economic question is whether reducing school fees represents an

efficient use of resources.

 E.g. in Kenya where treatment schools received free uniforms & textbooks
showed that dropout rates fell considerably, & many students from nearby
schools transferred into the treatment group, raising class size by 50%.
 Researchers concluded that the financial benefit of free uniforms was a
significant factor in improving school attendance. Furthermore, concluded
that the government could reallocate education spending, trading off larger
classes for lower fees, & thereby increasing school completion rates.

• Design means-tested & targeted programmes where families are paid to send their
children to school. Several countries have adopted this approach, referred to as
conditional cash transfers.

 E.g. Bolsa Escola (family allowance) in Brazil & the Oportunidades programme
in Mexico provide modest stipends to millions of poor families as long as their
children remain in school.

 PROGRESA / Oportunidaes (Mexico) – families would receive conditional

cash transfers if their children were enrolled in school & if family members
visited health clinics for checkups & nutritional & hygiene information –
results school enrollment up (especially in middle school & more so for girls
than boys), grade repetition down.

 Programme in Cambodia financed by the Japan Fund for Poverty Reduction.

– The 45 neediest girls in each of 93 participating schools were awarded a $45
scholarship (a large sum in this low-income nation) – subject to various
conditions (the student enrolled in school needed to maintain a passing grade
& had to have a good attendance record). Evaluation of the programme –
large increases in desired outcome measures.

 Food for Schooling programme in Bangladesh provides a free monthly ration

of wheat or other grains to eligible families, where eligibility is means tested.
To maintain eligibility, children must attend 85% of classes each month. The
programme has been successful in increasing primary school enrolment,
promoting school attendance & reducing dropout rates, especially among
girls.

 If such transfers of cash or grain were going to be made on poverty grounds alone, then
making them conditional on sending children to school makes the education component
highly cost-effective. If intended primarily as interventions to expand enrollment & school
retention, cost-effectiveness depends, in part, on how carefully targeting is done.

 One cost-effective intervention for increasing school attendance (in addition to lowering fees)
is not an educational input; it is biannual worm treatments. Deworming proved highly cost-
effective in Kenya because the treatment cost is low, about $0.50 per child per year.
Deworming increased school attendance. [Downside, no discernible improvements in
learning as measured by student test scores at the time of treatment.] But, new findings from
the original deworming randomised controlled trial (RCT) reveal its long-term benefits.
Comparing those who attended schools where the treatment was provided with those where
it wasn’t reveals that deworming is associated with more subsequent years enrolled in school,
 better self-reported adult health, more hours spent working, higher earnings among those
employed in wage-paying jobs, & improvements in adult food consumption.

 Other issues – reduce class size, increase the availability of textbooks & other instructional
materials & improve teacher training.

 Class size: basic argument is that in smaller classes, teachers can provide more attention, even
individualised work for each student.

 Findings from studies indicate that there is no evidence of a robust & significant correlation
between class size & student performance.

 So, in some cases, reducing class sizes is warranted; in others, the extra expenditure on
teachers & additional classrooms yields no return.

 Other issues – reduce class size, increase the availability of textbooks & other instructional
materials & improve teacher training.

 Studies of teacher training or textbook use yield a range of outcomes.

 E.g., the introduction of textbooks in Jamaican primary schools improved reading scores, while
in the Philippines the impact of textbooks was “unstable”, including positive & negative effects
on the maths & reading scores of 1st graders.

 A RCT in rural Kenya found no evidence that provision of textbooks improved scores for the
average student.

 However, Kenyan students who were above average before textbooks were provided realised
improvements.

 This may be because textbooks provided by the govt. were in English & only the most able
student had sufficient English language skills to benefit from the textbooks they received.

 What the textbook studies suggest is that the central problem may not be an absence of
learning materials but systemic problems in the education system. Textbooks that help only
the best students highlight problems with a centralised national curriculum oriented to
educating the children of the politically influential elite & failing to recognise the
heterogeneity among students.

 Note: no single intervention will work all the time. Local conditions make a difference, such
as the accountability of teachers, principals & other school officials.

It’s about more than the money

 If there has been a trend in thinking about education & development, it has gone from concern
primarily over increasing the quantity of schooling, achieved by building more schools, hiring
more teachers, & most recently, reducing the cost of attending to improving the quality of
schools by improving the amounts & mix of inputs within schools themselves.
  But widespread & persistently low student achievement has resulted in a call not only for
more money but also for reform of school systems. School reform & more resources need
not be substitutes. Both may be needed to realise better outcomes, but more money without
school reforms will be insufficient to achieve these ends.

 Improvements in governance are needed not only to improve the climate for private
enterprises & encourage investment in physical capital but to improve investment in human
capital.

 1 critical area of school reforms is to better motivate teachers, many of whom fail to show up
for work & to engage in teaching when they do. With weak incentives, teacher motivation
often is low.

• But, the authors of an Indian study did not find that relatively higher pay or more
education among teachers reduces absences. Stronger ties to the local community
don’t seem to play much of a role either. Schools with better infrastructure (e.g.,
electricity), more frequent inspections, & closer proximity to roads have somewhat
lower absenteeism, but the overwhelming conclusion is that getting more teachers to
do their jobs is a significant challenge.

• In explaining why teacher absence is so high, the authors of the Indian study note that
teachers face little risk of being fired.

- An innovative solution to reducing teacher absence in some school in India is

explained in Box 8-4. Essence of the story: A RCT was conducted where
teacher attendance was monitored through the use of cameras. Very
successful, but unlikely to be adopted in government schools BECAUSE OF
RESISTANCE FROM TEACHER UNIONS!

 The absence of repercussions is 1 explanation for high absence rates but the problem of
accountability runs far deeper.

 Teacher absence or, for that matter, any no. of other government workers is not the only e.g.
of the breakdown in accountability that compromises the delivery of public services in low- &
middle-income nations.

Chapter 9

Discuss the linkages between investments in health and education. (12)

Health & education are closely related (½ mark) in economic development as health and
education are investments made in the same individual (½ mark). Health is central to
well-being (½ mark), and education is essential for a satisfying (½ mark) & rewarding
life (½ mark); both are fundamental to the broader notion of expanded human
capabilities that lie at the heart of the meaning of development (1 mark). At the same
 time, education plays a key role in the ability of a developing country to absorb modern
technology (½ mark) & to develop the capacity for self-sustaining growth & development
(½ mark). Moreover, health is a prerequisite for increases in productivity (½ mark), while
successful education relies on adequate health as well (½ mark). Thus both health &
education can also be seen as vital components of growth & development – as inputs
to the aggregate production function (1 mark). Their dual role as both inputs & outputs
gives health and education their central importance in economic development (1 mark).

The arguments presented below summarise the linkages between investments in health
& education.

On the one hand, greater health capital may raise the return on investment in education
(½ mark – if not awarded above) for several reasons:
 Health is an important factor in school attendance (1 mark)
 Healthier children are more successful in school and learn more efficiently (1 mark)
 Deaths of school-age children also increase the cost of education per worker (1
mark).
 Longer life spans raise the return to investments in education (1 mark).
 Healthier individuals are more able to productively use education at any point in life
(1 mark).
On the other hand, greater education capital may raise the return to investment in health
(½ mark – if not awarded above) in the following ways:
 Many health programmes rely on skills learned in school including personal hygiene
& sanitation, not to mention basic literacy and numeracy (1 mark).
 Education is needed for the formation and training of health personnel (1 mark).
Finally, improvements in productive efficiency from investments in education raise the
return on a lifesaving investment in health (1 mark).

Discuss the epidemiologic transition.

 Dramatic improvements in life expectancy & reductions in infant & child mortality during
the past century resulted in equally dramatic demographic & socioeconomic changes. The
changes led to lower fertility rates & slower rates of population growth.

 Worldwide, youth dependency declined while elderly dependency rose.

 In coming decades, demographic change will accelerate as the consequences of the

developing world’s transition from high to low population growth rates combine with falling
child mortality & rising life expectancy.

 As societies age & health improves, the pattern of disease & causes of death also shift in a
generally predictable pattern. This shift in disease pattern is referred to as the epidemiological
transition.

 1 early characterisation of the epidemiological transition identified 3 main stages

 The age of pestilence & famine (most of human history & was a time of frequent
epidemics & famines. Chronic malnutrition existed as did severe maternal & child
health problems. Health outcomes affected by environmental problems, e.g., unsafe
H20, inadequate sanitation, & poor housing)
  The age of receding pandemics (death rates fell as infectious disease & famines
declined. As people lived longer, they began to experience heart disease & cancer in
greater numbers.)

 The age of degenerative & human-made diseases (mortality rates are low & chronic
degenerative diseases (e.g., heart disease) & human-made diseases (e.g., smoking) &
environmental diseases (such as those caused by pollution) take the place of
infectious diseases as the primary cause of death)

 Other stages sometimes added, e.g., emerging & reemerging infectious disease!

 Old infectious diseases may cause increased morbidity & mortality due to resistance to
antimicrobial therapies, as is the case for drug-resistant TB, & new pathogens continue to
emerge. HIV/AIDS is the best known of these new infections, although other new infectious
diseases have emerged over the past 30 years, including the Ebola virus, severe acute
respiratory syndrome (SARS) & recent strains of avian & H1N1 swine flu.

 The 20th century saw a major shift in causes of death & disability from infectious diseases to
non-communicable diseases. However, not all countries made this transition fully. Many
of the poorest countries & poorest sub-populations in middle-income countries still suffer
from high rates of infectious diseases, maternal & perinatal conditions, & nutritional
deficiencies that stopped being problems in high-income nations.

 High-income countries have greatly reduced mortality from communicable diseases, but these
diseases remain high in developing countries.

 Heart disease, a non-communicable disease, is now the leading cause of death worldwide.
Diseases common in high-income nations, including heart disease & cancers, are becoming
more prevalent in low- & middle-income nations.

Does the graph below (i.e., Fig 9-2) demonstrate increasing or decreasing marginal
correlation between health & income? Please explain what in the graph gives you your
answer. Please also explain the intuition behind such marginal correlation between health
& income.

 The graph shows decreasing marginal correlation between child mortality & income.

 This is implied by the slope of the graph that gets smaller & smaller (in absolute value) as we
move to the right of the graph, meaning that the negative correlation between child
mortality & income gets smaller as income gets larger or as child mortality gets lower.

 Note that we can’t say anything about the direction of causality between the 2 variables just
by looking at this simple graph. The intuition underlying such a decreasing marginal
correlation could therefore go in both directions.
  1 is that for low income countries, a basic indicator of health like child mortality is due to a
great extent to the lack of medical facilities & health care that in turn results from the lack
of financial resources. An  in income is therefore very NB in reducing this mortality.

 For high income countries, however, the lack of facilities & care that are associated with
financial resources is much less of a problem, & hence an increase in income is of much less
effect. A larger portion of child mortality in high income countries can be attributable to
biological factors.

Discuss the relationships between health and education on the one hand, to productivity and
incomes on the other.

Health and education levels are generally much higher in high-income countries than in
low-income countries (1 mark). There are good reasons to believe that this runs: with
higher income, people and governments can afford to spend more on education and
health (½ mark); with greater health and education, higher productivity and incomes are
possible (½ mark). Furthermore, countries with higher life expectancy have faster
economic growth (1 mark). [Note: even if higher life expectancy did not translate into
more rapid growth or higher annual income, it would translate to higher lifetime earnings
–alternative 1 mark.]. It has been noted that even in poor counties, there is a strong
positive relationship between better health and economic growth, income levels and
poverty (1 mark). Mortality rates are highest in the poorest countries, and they drop off
sharply in conjunction with higher incomes (1 mark). Countries with higher life
expectancies have much lower rates of poverty (1 mark).

Because of these relationships, development policy needs to focus on income, health,

and education simultaneously (1 mark).

Reasons for the aforementioned conclusion are discussed below.

It is generally accepted that as incomes increase, individuals, households, and societies

at large are able to increase spending on a range of goods and services that directly or
indirectly improve health (1 mark). With higher incomes, poor households can more
easily afford clean water and basic sanitation facilities, which can help control disease
(1 mark). Also as incomes rise, poor households can afford better shelter, which in turn
should keep them healthier (1 mark). They are also more likely to be able and willing to
seek medical care when it is needed (1 mark), either because they can afford the
transportation costs to the clinic or pay for medicines or other out-of-pocket expenses (1
mark). For society as a whole, as incomes rise, there is a greater ability to build public
health clinics and hospitals, train more doctors and nurses, and pay for public health
services such as immunisation campaigns or insect spraying programmes (1 mark). The
level of per capita income, of course, is not the only determinant of health outcomes.
The distribution of income matters, too (1 mark). For any given level of per capita
income, the more equal is the distribution, the better the expected aggregate health
outcome (1 mark). The creation and dissemination of medical knowledge and public
health practices was central to the historical rise in life expectancy in the now developed
countries (1 mark).

Better health increases life expectancy. It also affects both fundamental causes of
economic growth: productivity gains (½ mark) and increased investment (½ mark).

There is considerable evidence that the better the education of the mother, the better
the health of her children (½ mark). A mother’s basic health knowledge tends to have a
positive effect on her children’s health (½ mark). Health status, once attained, also
affects school performance, as has been shown in studies of many developing countries
(½ mark). Better health and nutrition leads to earlier and longer school enrolment (½
mark), better school attendance (½ mark), and more effective learning (½ mark).
Furthermore, healthier people tend to be more economically productive, since they are
more energetic and mentally more alert (1 mark). [A family member’s lack of health can
also have an impact on children’s education, which in turn has implications for future
income – alternative 1 mark.] When workers are healthier and more productive, firms
are willing to pay them higher wages. Beyond its impact on labour productivity, improved
health can influence the other key channel for achieving economic growth, saving and
investment. As people expect to live longer, they have greater incentives to make long-
term investments in their farm or other business and their human capital (1 mark). On
the flip side the presence of diseases reduces the size of the workforce and its
productivity, at the same time that it decreases the ability of households, firms and the
government to invest in the future (1 mark).

Finally, there are important spillover benefits to an individual’s investment in her health
or education. An educated person provides benefits to people around her, such as
reading for them (½ mark) or coming up with innovations that benefit the community (½
mark).

Unfortunately, if development policies are followed that emphasise increasing incomes

of the poor without attention to the way these additional resources are expended within
the family the higher income may not lead to improved health and education (½ mark),
and successful development more generally (1 mark). For example, studies show that
an increase in income frequently allows families in developing countries to switch
consumption from nutritious foods such as beans and rice to non-nutritious “empty
calories” such as sweets and soda, which may be perceived as modern and a symbol
of economic success (1 mark).
12. What investments can an LDC government make to increase the health and reduce the

incidence of disease in the LDC? Examine these investments in the light of the opportunity

cost for other investments, including those in social capital.

Answer: Life expectancy is probably the best single indicator of national

health levels. Poor nutrition and bad health contribute not only to physical suffering and
mental anguish, but also to low labour productivity. Thus, doing things to improve health
generally will increase productivity and the return to that investment. This return will be as
high as in any other area of social capital since it so closely affects productivity. Without
health, the other social capital investments will not be fully realised.

With over 400 000 new HIV infections occurring in 2012, South Africa ranks first in HIV incidence in
the world, says an HSRC survey.

The proportion of South Africans infected with HIV has increased from 10.6% in 2008 to 12.2% in
2012, according to the Human Sciences Research Council's (HSRC) National HIV Prevalence,
Incidence and Behaviour Survey that was released on Tuesday. The total number of infected
South Africans now stands at 6.4-million; 1.2-million more than in 2008.

What are the developmental implications of such high HIV/AIDs infection rates in Africa, and more
specifically, South Africa?

 The HIV/AIDS pandemic has had a crippling effect on many countries that were making
significant progress in health. Whereas most countries in sub-Saharan Africa had achieved
steady increases in life expectancy in the 1960s, 1970s & 1980s, in several countries, including
South Africa, this progress stopped in the late 1980s & has since reversed.
• The effects on communities & families are devastating as parents, children &
community leaders become sick & die.
• Unlike most diseases that tend to incapacitate the very young, the very old or those
already weakened by other conditions, HIV/AIDS attacks primarily young adults & the
economically active segment of the population
 In Africa, HIV disproportionately destroys the lives of society’s most productive members. HIV
has thus reduced the size of the workforce and its productivity. Households face catastrophe
as income earners fall ill, lose their labour income, face increased expenditures on health &
eventually succumb to the disease.
• The long duration of AIDS illness thus makes it particularly costly.
• In addition to the aforementioned losses, others in the family must stop work to care
for those that are ill.
- Firms in southern Africa, where HIV prevalence rates are the highest in the
world, lose workdays due not only to the illness of employees but also in time
lost to attending the high no. of funerals of co-workers & family members.
• Small farms & gardens go untended & children may be taken out of school to tend to
sick family members or to go to work to earn extra income.
 • Families become further impoverished as they face increasing medical costs & have
less income to pay for food, clothing, or other expenses.
• In some cases, funeral costs may be higher than healthcare costs & add to a family’s
burden.
- Studies in Tanzania & Thailand estimated that the cost of medical care &
funerals can be > the h/h annual income, triggering borrowing, asset sales or
other coping strategies that can have long-term financial welfare implications.
HIV/AIDS has also decreased the ability of firms and the government to invest in the future.

• firms confront increased expenditures on health benefits & insurance, higher

absenteeism & job turnover, & greater training costs due to premature deaths; &
• government finds that health expenditures crowd out other high-priority
expenditures.

 Studies suggest that HIV/AIDS may currently cost SA a full percentage point of annual economic
growth. This has had an adverse effect on South Africa’s economic growth and development,
which in turn has reduced available resources to cope with the epidemic

Furthermore, many of the effects of HIV/AIDS are intergenerational

 Combating the epidemic requires strong national & international commitment.

 Until scientists develop other interventions such as a cure, the key to halting the spread of the
disease is strong prevention programmes coupled with adequate care & treatment.

 In richer countries, where people can afford treatment, the development of ARVs has made
AIDS a chronic disease that can be managed, rather than a fatal disease, allowing those
infected to resume a relatively normal lifestyle.

 But for most people in the poorest countries, ARVs remain out of reach.

 Delivering antiretroviral therapy on a global level requires not only good science & health policy
but also political & economic initiatives.

 The most cost-effective way to provide the massive quantities of drugs required at hugely
discounted prices is to encourage the manufacture of generic versions of these antiretroviral
agents.

 Issues of trade-related intellectual property rights & patents must be considered. One
challenge is to encourage such manufacture while providing incentives for major
pharmaceutical companies to develop newer medicines as patients develop resistance to
the current stock.

 Finding the needed funds to fight the disease will be a continuing challenge, & even when the
funds are found, they will have significant opportunity costs because funding is diverted from
other key challenges to fight HIV/AIDS.