CHAPTER FIVE

HUMAN CAPITAL FORMATION: EDUCATION AND HEALTH IN ECONOMIC

DEVELOPMENT

5.1. The Central Roles of Education and Health

Education and health are basic objectives of development; they are important ends in themselves.
Health is central to well-being, and education is essential for a satisfying and rewarding life; both are
fundamental to the broader notion of expanded human capabilities that lie at the heart of the meaning
of development. At the same time, education plays a key role in the ability of a developing country to
absorb modern technology and to develop the capacity for self-sustaining growth and development.
Moreover, health is a prerequisite for increases in productivity, while successful education relies on
adequate health and education can also be seen as vital components of growth and development-as
inputs to aggregate production.

Although there are some improvements in health and education, the developing world continues to face
great challenges as it seeks to continue to improve the health and education of its people. The
distribution of health and education within countries is as important as to be quite high for better off
people in developing countries but far lower for the poor. The same is true for the distribution of
schooling. This is believed to be one of the reasons for disparity in living standard of the people in
developing countries.

5.2. Education and Health as Joint Investment for Development

Health and education are closely related in economic development. On the one hand, greater health
capital may improve the return to investments in education. In part, this is because health is an
important factor in school attendance and in the formal learning process of a child. A longer life raises
the return to investments in education; better health at any point during working life may in effect lower
the rate of depreciation of education capital.

On the other hand, greater education capital may improve the return to improvements in health,
because many health programs rely on basic skills often learned at school, including personal hygiene
and sanitation. Education is also needed for the formation and training of health personnel. Finally, an
improvement in production efficiency from investments in education raises the return on a life saving
investment in health.
5.3. International Trends and Convergence in Health and Education

The last half century witnessed unprecedented advances in human capital. Health and education levels
improved in both developed and developing countries, but by most measures have improved more
rapidly in developing countries. As the result, there has been some international convergence in these
measures. This is in strong contrast to per capita income, which shows little or no sign of convergence
across countries.

However, this is not confidential while children continue to die in low income countries at a rate 10
times as high as in the developing countries. Moreover, past patterns cannot be used confidentially to
predict the future. For example, it is also possible that the rate of convergence itself could slow. And
very recently, the gain of health in the poorest countries has become under some major problems such
as AIDS, tuberculosis, resurgent malaria and the specter of newly resistant bacteria.

5.4. The Gender Gap: Women and Education

Young females receive considerably less education than young males in almost every developing
country. Why is female education important? Is it simply a matter of equity? The answer is that there
now exists ample empirical evidence that educational discrimination against women hinders economic
development in addition to reinforcing social inequality. Closing the educational gender gap by
expanding educational opportunities for women is economically desirable for four reasons.

 The rate of return on women’s education is higher than that on men’s in most developing
countries
 Increasing women’s education not only increases their productivity on the farm and the factory
but also results in greater labor force participation, later marriage and lower fertility
 It results in greatly Improved child health and nutrition
 Because women carry a disproportionate burden of the poverty and landlessness that
permeates developing societies, any significant improvements in their role and status via
education can have an important impact on breaking the vicious circle of poverty and
inadequate schooling

5.5. Education System and Development: Private and Social Benefits and Costs of Education

Empirical evidences reveal that education system of most LDCs has the tendency to raise private
benefits rather than social benefits as the level of education is higher and higher. In fact, at lower level
of education, relatively greater social benefits are observed. Figure 5.1 shows that till the completion of
primary education, social benefit from education increases at a higher rate than that of the private
benefit with the rise in the level of education. Moreover, at this level of education social cost of
education is relatively lower.
Private cost Private benefit

and benefit

Private cost

0 Primary Secondary Tertiary Level of education

Fig 5.1. A) Private costs and benefits of education

social cost Social cost

and benefit

Social benefit

0 Primary Secondary Tertiary Level of education

Fig 5.1. B) Social costs and benefits of education

The figure indicates that private benefits of education is increasing and increasing all the time being far
from the private costs as the level of education increases. This implies net private benefit of education
increases persistently as the level of education increases. Conversely, social benefits initially increases at
a higher rate having a relatively lower level of cost till the end of the primary level of education. But,
later, starting from the beginning of the secondary education the social cost of education increases at a
higher rate than that of the social benefit. The figure shows that the social marginal benefit and the
social marginal cost are equal at the end of the primary level of education implying that the net social
benefit of education is maximized at the end of the primary level of education. Generally, we can
conclude that the educational system in LDCs favors the private individuals rather than the entire social
system as the level of education is increasing. The implication is that the level of income inequality has
the tendency to worsen with the increase in the level of education.

Assignment 2: Justify your reason for such kind of a phenomenon to happen in LDCs including
Ethiopia.