CHAPTER 8

human capital:
education and health
in economic development
In this chapter, we will examine 2 human capital issues, education and health and their
dual impacts on developing countries. In this chapter, we also examine their close
relationship with income and take a closer look at education and health systems in
developing countries.

8.1 the central role of education and health

Education and health are important objectives of development because both are
fundamental to what development is.
Having good health is a prerequisite for achieving higher productivity, and successful
education heavily depends on health as well. Thus, Both health and education are
important components of growth and development because of their dual roles as
inputs and outputs that give health and education their central importance towards
economic development.
Despite drastic achievements in health and education, developing countries are still
burdened with improving health and education of its people

education and health as joint investments for development

Education and Health are joint investments in the same individual. When an individual
invests in greater health, their education will be benefited and vice versa.
Greater health capital may improve the returns to investments in education because
1. health is a crucial factor for the process of learning and better health may lower
the rate of educational capital depreciation.
2. health is a factor in school attendance because an individual needs to be healthy
to continuously attend school
3. Healthier students tend learn more effectively and efficiently
4. longer life raises the rate of return to education
Greater education capital may improve the returns to investments in health because of
1. skills required in health programs are learned in school and is foundation for
training of health personnel
2. Certain subjects in school may teach basic health skills like  hygiene and sanitation
that are needed to take good care of individual's bodies.
Improving Health and Education: Why Increasing Incomes is not Sufficient
The distribution of health and education within countries is as important as income
distribution. Having higher income allows people to afford better education and health,
and with greater education and health, there will be higher productivity and incomes
for individuals.
However increases in income do not often lead to substantial increases in investment in
children's education and health.
There certain factors like development policies that affect the improvement in
investments of education and health. Poverty alleviation strategies like credit for
microenterprises may help improving children's nutrition but it will not be sufficient if
the said nutrition remains inadequate and does not improve with higher income. Health
status affects performance in school, and having better nutrition and health is a positive
factor in learning effectively in school.  Thus, development policies should treat
income,  education and health simultaneously.

8.2 investing in education & health: the human capital approach

Human capital term economists often use for education, health, and other human
capacities that can raise productivity when increased.
Human capital approach: the analysis of investments in health an education is unified in
the human capital approach

How is the human capital approach applied?

First, an analogy to conventional investments in physical investment is made. After
initial investments, higher income can be generated from investments in education and
health.
The resulting rate of return will be compared to returns to other investments through
estimating the present discounted value to direct and indirect costs. However the
approach centers more on the indirect ability of increasing health by increasing
incomes. 

1. Initial investments in health or education lead to higher future income

2. The present discounted value of stream of future income is compared to the costs
of investment after initial investments have been made.
3. Private returns to high education are high, and may be higher than social returns,
especially at higher education levels as shown in the following illustration.
The human capital approach will be illustrated through educational investments,
although same principles are applicable to health investments.

Basically, the illustration assumes that an individual works from the time they finish
school, so this takes 66 years of their lifespan. We have two workers, one that has only
finished primary school and one who is a secondary graduate. It assumed that they
started working at the age of 13 for primary grad and 17 for secondary grad., and the
indirect cost is the four years of income are forgone from deciding to continue to
secondary school. Direct costs here are those expenditures that would not have
incurred if the individual did not leave for work after primary school. The difference
termed benefits is  money made by the individual the rest of their life. So, a secondary
graduate would make more money each year that those earned only with primary
education. Thus, the rate of return will be higher whenever direct/indirect costs are
lower or the benefits are higher.

8.3 Child labor

Child labor is a widespread phenomenon.
Child labor is work that is mentally, physically, socially or morally dangerous and
harmful to children and interferes with their schooling.

The child labor problem may be modeled using the "multiple equilibria" approach
Government intervention may be call for to move to a better equilibrium
Sometimes shifts can be self-enforcing, so active intervention is only needed at first
Assumptions of Child Labor Multiple Equilibria Model
Luxury Axiom: A household with sufficiently high income would not send its children to
work
Substitution Axiom: Adult and child labor are substitutes, in which the quantity of
output by a child is a given faction of that of an adult:  Qc = YQA , 0 < Y < 1
illustration of child labor as bad equilibrium

Other approaches to Child Labor Policy

1. Get more children into school
2. Emphasize in ending poverty generally
3. Regulate to prevent abuse and provide support services for working children if
child labor is inevitable in the long run
4. Ban child labor, or if impossible, ban child labor in its abusive forms
5. Activist approach: trade sanctions against countries that allow child labor.
Concerns: could backfire when children shift to informal sector, and if export
sector growth slows

8.4 the gender gap: discrimination in education and health

1. Younger females receive less education than young males in nearly every low and
lower-middle income developing country
2. The educational gender gap is especially great in the least developed countries
in Africa, where female literacy rates can be less than half that of men in countries
such as Niger, Mali, Guinea, and Benin.
3. Closing the educational gender gap is important because:
1. it can break the cycle of poverty and inadequate schooling for women
2. educated mothers have multiplier impact on future generations
3. education for women lowers fertility and increases productivity
4. Women are discriminated in health care such as families in certain countries are
least likely to take their ill daughters to a hospital, women are denied reproductive
rights, and health spending on women is relatively lower than those spent in men.
5. Consequences of gender bias in health and education limits the possibility of
earning higher rates of return on investments for women.
1. Economic incentives and their cultural setting
2. Missing women mystery in Asia
6. Greater mother's education generally improves prospects for both her son's &
daughter's health and education
7. Increases in family income does not always lead to better health and education
8. No guarantee that higher health or education will lead to higher productivities
and incomes
1. Much depends whether gains from income growth and benefits of public
investments in health and education and other infrastructure are shared
equitably

8.5 educational systems and development

1. Political Economy of Educational Supply and Demand
1. In demand side, it is actually a derived demand for high-wage employment
opportunities in the modern sector.
2. In supply side, The quantity of schools is determined by political processes.
2. Social versus Private Benefit and Costs
 The widening gap between social and private costs provide greater stimulus to
demand for higher education.
3. Distribution of Education
1. There is unequal distribution of education in developing countries. Simply,
when quality (such as teaching, facilities, curriculum) is considered, inequality
is much greater.
4. Education, Inequality, and Poverty
1. a nation’s educational system can either improve or worsen income inequality.
5. Education, Internal Migration and Brain drain
1. Education is a factor for internal migration, and international migration of
high-level educated workers contribute to brain drain.

8.6 health measurement and disease burden

1. WHO defines health as " a state of complete physical, mental, and social well-
being and not merely the absence of disease or infirmity"
2. An alternative Health measurement provided by WHO is the DALY, disability-
adjusted life year. These measures the data for health diseases among countries.
3. With income and education, the distribution of health among the population, not
just averages is what matters.
4. Developing countries face a much more crippling disease burden than developed
countries, especially regarding infectious diseases like HIV/AIDS, Malaria, Parasitic
Worms and other Neglected tropical Diseases. Countries are burdened with
diseases that gradually increases in every period. These diseases cause millions of
deaths each year for developing countries.

8.7 health, productivity, policy

Productivity certainly has a connection with health.
Is there a connection between health and productivity?
Studies show that the healthier people earn higher wages
Careful statistical methods have shown that large part of effect of health on raising
earnings is due to productivity differences
Reverse casuality not confirmed
Health systems Policy
WHO’s definition, a health system is “all the activities whose primary
purpose is to promote, restore, or maintain health.”
great variability in the performance of health systems at each income level