CHAPTER TWO
HUMAN CAPITAL FORMATION: EDUCATION AND HEALTH IN
ECONOMIC DEVELOPMENT
2.1. 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.
2.2. 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
1
personnel. Finally, an improvement in production efficiency from investments in education
raises the return on a life saving investment in health.
2.3 Improving Health and Education: Why Increasing Income Is Not Sufficient
Health and education levels are much higher in high-income countries. There are good reasons to
believe that the causality runs in both directions: With higher income, people and governments
can afford to spend more on education and health, and with greater health and education, higher
productivity and incomes are possible. Because of these relationships, development policy needs
to focus on income, health, and education simultaneously People will spend more on human
capital when income is higher. But the evidence shows clearly that even if we were able to raise
incomes without a large improvement in health and education, we could not count on that
income increase being used to adequately invest in children’s education and health.
The market will not solve this problem automatically, and in many cases, household
consumption choices themselves may lead to a surprisingly small link between income and
nutrition, especially for children. The income elasticity of the demand for calories (that is, the
percentage change in calories consumed for a percentage change in family incomes) among low-
income people range from near zero to about 0.5, depending on the region and the statistical
strategy used by the researchers. This less than proportional response is due to two factors:
Income is spent on other goods besides food, and part of the increased food expenditures is used
to increase food variety without necessarily increasing the consumption of calories. If the
relationship between income and nutrition is indeed quite low, as some studies suggest, then
development policies that emphasize increasing incomes of the poor without attention to the way
these additional resources are expended within the family may not lead to improved health, and
successful development more generally, at least not very quickly.
There is considerable evidence that the better the education of the mother, the better the health of
her children. Usually, formal education is needed in complementary relationship with ongoing
access to current information.
2.4 Investing in Education and Health: The Human Capital Approach
The analysis of investments in health and education is unified in the human capital approach.
Human capital is the term economists often use for education, health, and other human capacities
2
that can raise productivity when increased. An analogy is made to conventional investments in
physical capital: After an initial investment is made, a stream of higher future income can be
generated from both expansion of education and improvements in health. As a result, a rate of
return can be deduced and compared with returns to other investments. This is done by
estimating the present discounted value of the increased income stream made possible by these
investments and then comparing it with their direct and indirect costs. Of course, health and
education also contribute directly to well-being. For example, education increases empowerment
and autonomy in major matters in life, such as capacity for civic engagement, making decisions
concerning one’s own health care, and freedom to choose one’s own spouse over arranged
marriage. But the basic human capital approach focuses on their indirect ability to increase well-
being by increasing incomes.
2.5 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 below 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.
Fig A Private benefit and cost of education
3
Social cost Social cost
and benefit
Social benefit
Primary Secondary Tertiary Level of education
Fig. 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.
2.6 Education, Inequality, and Poverty
Studies have also demonstrated that contrary to what might have been assumed, the educational
systems of many developing nations sometimes act to increase rather than to decrease income
inequalities. The basic reason for this perverse effect of formal education on income distribution
is the positive correlation between level of education and level of lifetime earnings. This
4
correlation holds especially for workers who are able to complete upper secondary and university
education.
The private costs of primary education (especially in view of the opportunity cost of a child’s
labor to poor families) are higher for poor students than for more affluent students, and the
expected benefits of (lower-quality) primary education are lower for poor students. Together, the
higher costs and lower expected benefits of education mean that a poor family’s rate of return
from investment in a child’s education is lower than it is for other families. The poor are
therefore more likely to drop out during the early years of schooling. As a result of these higher
opportunity costs, school attendance, and therefore school performance, tends to be much lower
for children of poor families than for those from higher-income backgrounds. This is greatly
compounded by the lower quality of schools attended by the poor, plagued by poor teaching and
teacher truancy and inadequate facilities. Thus in spite of the (often very recent) existence of free
and universal primary education in many developing countries, children of the poor, especially in
rural areas, are often unable to proceed beyond the first few years of [Link] financial
process of eliminating the relatively poor during their first few years of schooling is often
compounded by the substantial tuition chargedat the secondary level.
2.7 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
5
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
2.8 Health and Gender
Girls also face discrimination in health care in many developing countries, In South Asia, for
example, studies show that families are far more likely to take an ill boy than an ill girl to a
health center. Women are often denied reproductive rights, whether legally or illegally. Broadly,
health spending on men is often substantially higher than that on women. And in many countries
such as Nigeria, health care decisions affecting wives are often made by their husbands. Female
genital mutilation/cutting (FGM/C) is a health and gender tragedy, explained in the 2005
UNICEF report changing a Harmful Social Convention: Female Genital Mutilation/Cutting.
FGM/C is most widely practiced in sub- Saharan Africa and the Middle East and is believed to
have affected about 130 million women.
2.9 Health, Productivity, and Policy
Productivity
The devastating effects of poor health on child mortality are clear enough. But do poor health
conditions in developing countries also harm the productivity of adults? The answer appears to
be yes. Studies show that healthier people earn higher wages. The preponderance of the evidence
is that health and nutrition do affect employment, productivity, and wages and very substantially
so among the poorest of the poor. This finding magnifies the policy priority of health in
development; not only is health a major goal in itself, but it has a significant impact on income
levels as well. After their exhaustive review of the literature and its complex statistical and data
problems, Strauss and Thomas conclude that “the balance of evidence points to a positive effect
of elevated nutrient intakes on wages, at least among those who are malnourished. A healthy
population is a prerequisite for successful development.
Health Systems Policy
In the WHO’s definition, a health system is “all the activities whose primary purpose is to
promote, restore, or maintain health.” Health systems include the components of public health
departments, hospitals and clinics, and offices of doctors and paramedics. Outside this formal
system is an informal network used by many poorer citizens, which includes traditional healers,
6
who may use somewhat effective herbal remedies, or other methods that provide some medical
benefits, such as acupuncture, but who also may employ techniques for which there is no
evidence of effectiveness beyond the placebo effect. It has long been understood that some
developing countries’ health systems were far more effective than others in achieving health
goals. The WHO concluded that “dollar for dollar spent on health, many countries are falling
short of their performance potential. The result is a large number of preventable deaths and lives
stunted by disability. The impact of this failure is born disproportionately by the poor.” At any
given income level, there was wide variation in country performance, showing that a low-income
country can achieve fairness in allocating the resources that it has. Health is also an effective
means to achieve goals of poverty reduction.
An effective government role in health systems is crucial for at least four important reasons.
First, health is central to poverty alleviation, because people are often uninformed about health, a
situation compounded by poverty. Second, households spend too little on health because they
may neglect externalities (such as, literally, contagion problems). Third, the market would invest
too little in health infrastructure and research and development and technology transfer to
developing countries due to market failures. Fourth, public health programs in developing
countries have many proven successes. Government has different roles in different countries, but
as the WHO concluded, “The careful and responsible management of the well-being of the
population— stewardship—is the very essence of good government. . . .The health of people is
always a national priority: government responsibility for it is continuous and permanent.