Chapter 2

Human Capital: Education and Health in

Economic Development
The Central Roles of Education and Health
Education is a form of human capital vital to growth
and development as input to aggregate production
function. It is an input to growth and development
It is both a consumption and investment good for the
individual.
It is a basis for a healthy life and improves the return
to investment in health.
 The Central Roles of Education and
Health…
On national level, it plays a key role in the ability of a
developing country to absorb modern technology thereby
enhance a self-sustaining growth and development.
Health is central to wellbeing and fundamental to human
capabilities.
It is an input to aggregate production function as a form of
human capital
It is a prerequisite for increases in productivity and a condition
for successful education
Both health and education are forms of human capital that are
closely related to one another
Though they are related to household income, higher household
is no guarantee of improved health and education
Education and Health as Joint Investments
for Development
Greater health capital may improve the returns to
investments in education
Greater education capital may improve the returns to
investments in health
International trends indicate a convergence in health and
education (human capital)
The progress are measured using the following ratios and
indices
Primary and Secondary enrollment rate, Teacher-pupil
ratio, average schooling in years
Life expectancy, survival rate
Improving Health and Education: Why
Increasing Incomes Is Not Sufficient?
Increases in income often do not lead to substantial
increases in investment in children’s education and health
Better educated mothers tend to have healthier children
Significant market failures in education and health require
policy action.
Advanced countries perform better than poor countries.
With regard to the relationship between income and
education and health, the following conditions hold:
Investing in Health and Education: The
Human Capital Approach
With higher income, people and governments can afford to
spend more on education and health.
With greater health and education, productivity increases and
higher incomes are possible
Initial investments in health or education lead to a stream of
higher future income
The present discounted value of this stream of future income
is compared to the costs of the investment
Private returns to education are high, and may be higher than
social returns
Thus, the human capital approach focuses on the indirect
ability of education and health to increase utility by increasing
income rather than their direct contribution to well-being.
Investing in Health and Education: The
Human Capital Approach…
As normal good, people spend more on human capital
when income is higher.
This being the case, evidences show that the income
elasticity of the demand for calories (percentage change
for calories consumed for a change in family income),
among low income people ranges from near zero to about
0.5, which is very low.
The reasons for this less than proportional response are:
Income is spent on other goods beside food
Part of the increased expenditure for food is used to
increase variety than increased calorie
Investing in Health and Education: The
Human Capital Approach…
Thus, development policies that emphasize increasing
incomes of the poor may not necessarily lead improved
health
Moreover, an income increase in families of
developing countries frequently leads to switching
consumption from nutritious food items, which are
perceived as modern and marks of economic success
The nutrition of earners of income is not the same the
nutrition of their children
Education: Salient Features in LDCS
The rate of return from investment in human capital is estimated from
the present discounted value of the increased income stream made
possible by the investment and then comparing it with the direct and
indirect costs. Age-earning profiles by levels of education are
instrumental to this effect. The income gains from, say education, can
be written as:

 t
(E  N t ) /(1  i ) t

Where, Et is income with education, Nt is income without education, t

is year, which begins from the year of beginning work of the lowest
educational level and extends over expected years of working life, “i” is
the rate of return or discount rate.
 Education: Salient Features in LDCS…
Despite the high return of education, many families do
not make this investment in developing countries. Higher
rates of return for developing countries reflect that the
income differential between those with more and less
schooling is greater on average than for the developed
countries
The possible reasons for families not to invest are that
they have no ability to borrow, rather they need the money
a working child would bring into the family
Child labor may be explained by the prevalence of two
stable equilibria in a developing country labor market
context
Child Labor

Child labor is a widespread phenomenon.

The problem may be modeled using the “multiple

equilibria” approach.

Government intervention may be called for to move to a

‘better’ equilibrium
Figure 2.3 Child Labor as a Bad
Equilibrium As long as the wage is
A = the supply curve of above WH, the supply
adult unskilled labor, which curve is along A. If the
is perfectly inelastic to wage is below WL, the
reflect that adults work supply curve is along
regardless of the wage E. In between the
supply curves follows
E= the aggregate supply the S-shaped curve. A
curve of all adults and and E are stable
children together equilibria. EU is
unstable equilibrium.
If the wage rate falls to WH,
poor households will start
sending their children to
work. At WL, all children
are working.
Policy Implications
When there are two equilibria: if the current state is at the bad
equilibrium, E2, an effective ban on child labor will move to the
good equilibrium, E1, and the child labor ban will be self-
reinforcing as the new equilibrium wage is higher than the other.
The challenges to this banning policy are employees who now
have to pay higher wages as a result of which they resort to
political pressure to prevent enactment of child labor laws
While these child labor models are probably reasonable
depictions of many developing areas, which do not know how
significantly these multiple equilibria are insignificant it would
be counterproductive to ban child labor immediately.
Policy Implications…
 The above-mentioned facts have led to the following
policies:
 Since child labor is an expression of poverty, the emphasis
is laid on eliminating poverty rather than addressing child
labor
 Emphasis on strategies to get more children into school
that include expanding school places and putting in place
incentives to include parents to send their children to
school
 If child labor is inevitable, prevent abuse and provide
support services for working children
 Banning child labor in its most abusive forms
Policy Implications…
Apart from child labor, the other obstacle to human
capital formation in LDCs is the “educational gender
gap”
 For all developing countries, the female literacy rate,
women’s year of schooling and female enrollment rates
are lower than the respective male counter parts
Empirical evidence exists that shows that educational
discrimination against women hinders economic
development in addition to reinforcing social inequality
The Gender Gap: Women and
Education
Young females receive less education than young males in nearly
every LDC
Closing the educational gender gap is important because,
The rate of return on women’s education is higher than that of
men in developing countries
It increases productivity and lowers fertility
Educated mothers have a multiplier impact on many
generations
It can break the vicious cycle of poverty and inadequate
schooling for women
Table 2.2 Male and Female Education
Rates, 2004
Figure 2.4 Female-Male Ratios in Total
Population in Selected Communities
Education: Salient Features in LDCS…
Recent studies demonstrate that educational system of many
LDCs sometimes act to increase rather than to decrease income
inequality
As levels of earned income are clearly dependent on years of
completed schooling, large income inequalities will be
reinforced if students from middle and higher income group are
represented disproportionally in secondary and university
enrollments and the poor are financially or otherwise denied
access to secondary and tertiary opportunities
The economic reasons, for education system to be inherently in
egalitarian (in the sense that poor students have less chance of
completing any given educational cycle than more affluent
students) are:
Education: Salient Features in LDCS…
The private costs of primary education, particularly the
opportunity cost of a child labor to poor families, are higher
for poor students than for more affluent ones
The expected benefits are also lower
The poor families’ rate of return from investment in
children’s education is lower than it is for other families,
leading to a likelihood of more dropping outs in the early
years of schooling
Highly subsidized university education using public funds
often demands to transfer payment from the poor to the
wealthy, as most university students come from the upper-
income brackets
Education: Salient Features in LDCS…
Educational attainments and the propensity to migrate from
rural to urban areas have been observed to have positive
relationship
Education also plays a powerful role on international
migration from poor to rich countries, brain drain
Brain drain reduces the supply of vital professional people
available with in LDCs
In addition, it diverts the attention of scientists, engineers,
physicians, architects and academicians away from important
local problems and goals
The internal brain drain is much more serious than the external
one (Todaro)
Educational Systems and Development

The Political Economy of educational supply and

demand:
the relationship between employment opportunities and
educational demands
Social versus private benefits and costs
Distribution of education
Lorenz curves for the distribution of education
Education Inequality and Poverty
Health: Salient Features in LDCs
The measurement and distribution of health are important
considerations
Life expectancy and infant survival rates independently have their
own shortcomings in measuring health, while together they might
proxy the health status better.
An alternative measure of health promoted by WHO is the DALY
(Disability Adjusted Life Year)
Average health levels measured using these measures can mask
greater inequality
Life expectancy of some social groups could be more or less than
the average by a decade or so
The poor are significantly less healthy than the more affluent.
 Health: Salient Features in LDCs…
All this shows that the distribution of health among the
population matters, not just the average measures
LDCs face a much more crippling disease burden than developed
countries, particularly in relation with infectious diseases
Absolute poverty, AIDS, malaria, and parasites are the major
health problems faced by developing countries
Absolute or extreme poverty plays a central role in health
problems
AIDS is the leading cause of death of working age adults in
LDCs
SSA is the hardest hit region
Malaria, which was once in retract is coming back in Africa
Health: Salient Features in LDCs…
The incidence of debilitating parasitic worms is
ubiquitous, where schistosomiasis tryponosomiasis are
the major ones
Statistical methods show that health affects earnings
and the larger parts of the effect of health on rising
earnings is due to productivity differences
The study by Robert Fogel (a Nobel Laurate) has found
out that citizens of developed countries are taller today
than they were to centuries ago
The stature of people is a useful index of the health
status and general wellbeing
This has been observed also in LDCs
Health: Salient Features in LDCs…
Height reflects various benefits achieved early in life,
having later day impact on wages, earnings, productivity,
employment etc
The literature suggests there is a positive effect of elevated
nutrient effects on wages
In WHO’s definition, a health system is all the activities
whose primary purpose is to promote, restore and
maintain health
The health system incorporates formal components such
as public health ministries, departments, hospitals,
clinics, etc and informal networks such as traditional
healthier.
Health: Salient Features in LDCs…
Comparison of health systems around the world indicates that
there is greater vulnerability in the performance of health
systems at each income level
The performance indicators of health systems in WHO member
states are:
 The overall level of health of the population
 Health ingredients within the population
 Health system responsiveness (patient satisfaction and system
performance)
 The distribution of responsiveness within the population (how
will people from economic status are served)
 The distribution or fairness of the financial burden of the
health system
Health: Salient Features in LDCs…
What is the need for effective government role in the health system?
Health has a crucial role, through its indirect positive effect, in
achieving the goal of poverty reduction
The role it plays extends across generations with long term
spillovers
Health investments require calculation of benefits and costs keeping
the long-term spillovers in mind
Government with good governance is an appropriate institution than
the market to reduce poverty
Households spend too little on health because they may neglect
externalities
The market would invest too little in health, as there are market
failures
Health Systems and Development
Health and Productivity
Is there a connection?

Emerging policy approaches

Health and education are join investment areas, which
means the most effective investment in education quality
involves the improvement of child health and the most
effective investment in health may be to improve the
quality of education
Health and education programs need to see the
distribution as well as the level of benefits and costs