CHAPTER TWO

Human Capital: Education and Health in

Economic Development

By: Shambel A.
 Objectives
After completing this chapter, students will;
• Clearly understand the role of human capital (education and health)
in development process of a country.
• Be able to examine the close relationship between these two major
components of human capital: Health and Education.
• Understand the causes and consequences of child labor in the
contemporary developing countries.
• Be able to examine the significance of investing in human capital
as a major path to economic development of a country.
• Have a clear picture with regards to the gender gap in educational
attainment and its costs to an economy.
• Have an exposure to the educational and health systems and
different policy options that they pursue.
Education and Health as Joint Investments
for Development
• Education is the process of facilitating learning, or the acquisition
of knowledge, skills, values, beliefs, and habits.
• It is a process by which man transmits his experiences, new
findings, and values accumulated over the years, in his struggle for
survival and development, through generations.
• It enables individuals and society to make all-rounded participation
in the development process by acquiring knowledge, ability, skills
and attitudes.
• Whereas, health is the level of functional and metabolic efficiency
of a living organism.
• In humans it is the ability of individuals or communities to adapt
and self-manage when facing physical, mental or social changes.
• The World Health Organization (WHO) defined health in its broader sense in its
1948 constitution as "a state of complete physical, mental, and social well-being
and not merely the absence of disease or infirmity.
 Health and education are closely related in economic
development
 Health and education are investments made in the same individual.
• Greater health capital may raise the return on investment in
education for several reasons:
o Health is an important factor in school attendance.
o Healthier children are more successful in school and learn more efficiently.
o Deaths of school-age children also increase the cost of education per worker.
o Longer life spans raise the return to investments in education.
o Healthier individuals are more able to productively use education at any point in life.

• Greater education capital may raise the return to investment in

health in the following ways:
o Many health programs rely on skills learned in school (including literacy and
numeracy).
o Schools teach basic personal hygiene and sanitation.
o Education is needed for the formation and training of health personnel.
o Education leads to delayed childbearing, which improves health.
o Improvements in productive efficiency from investment in education raise the return on
a lifesaving investment in health.
 Improving Health and Education: Why Increasing
Income Is Not Sufficient?
♣Empirical experiences show that health and education levels are
much higher in high income countries.
 Because, with higher income, people and governments can afford to
spend more on education and health. With greater health and
education, higher productivity and incomes are possible.
 So, development policy needs to focus on income, health, and
education simultaneously. This conclusion is that we need all-round
strategies to address the stubborn problems of absolute poverty.
♣People will spend more on human capital when income is higher.
 But some evidences show 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.
 Therefore,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.
 Cont…
♣Finally, there are other important spillover benefits to investment
in one's health or education.
 An educated person provides benefits to people around him or
her, such as reading for them or coming up with innovations that
benefit the community.
 A healthy person is not only less contagious but can also benefit
the community in many ways that a sick person cannot.
 Because of such spillover effects, the market cannot be counted
on to deliver the socially efficient levels of health and education.
Thus, the ultimate responsibility for the performance of a
country's health and education system lies with government. The
interrelationships among health, education, and incomes are
very strong and integrated strategies are needed.
Investing in Education and Health: The Human Capital
Approach
♠ Human capital is the term economists often use for education, health, and other
human capacities that can raise productivity when increased.
♠ It is productive investments embodied in human persons, including skills, abilities,
ideals, health, often resulting from expenditures on education, on-the-job training
programs, and medical care.

• Before comparing costs with benefits, note that a dollar today is worth more to an
individual than a dollar in the future, so those future income gains must be discounted
accordingly(apply the concept of Present value).
Cont…
Cont…
 Child Labor
• Child labor refers to the employment of children in any work that
deprives children of their childhood, interferes with their ability
to attend regular school, and that is mentally, physically, socially
or morally dangerous and harmful.
• This practice is considered exploitative by many international
organizations. Legislation across the world prohibits child labor.
These laws do not consider all work by children as child labor;
exceptions include work by child artists, supervised training,
certain categories of work such traditional societies.
• Child labor is a widespread problem in developing countries.
 When a child under age 14 work, their labor time disrupts
their schooling and in a majority of cases prevents them from
attending school.
 Cont…
• There are four main approaches to child labor policy currently in
development policy.
• The first recognizes child labor as an expression of poverty. It
emphasizes on eliminating poverty rather than directly addressing
child labor.
• The second approach emphasizes strategies to get more children
into school, including expanded school places, such as new village
schools, and incentives to induce parents to send their children to
school. Compulsory schooling is a good idea, but it is not an
effective solution to child labor.
• The third approach considers child labor inevitable, at least in the
short run, and stresses relaxing measures such as regulating it to
prevent abuse and to provide support services for working children.
• The fourth approach favors banning child labor. If this is not
possible, however, and recognizing that child labor may not always
result from multiple equilibria, this approach favors banning child
labor in its most abusive forms.
 Cont…
• Finally,many activists in developed countries have proposed
the imposition of trade sanctions against countries that
permit child labor or at least banning the goods on which
children work.
 This approach is well intentioned, but if the objective is the
welfare of children, it needs to be considered carefully,
because if children cannot work in the export sector, they
will almost certainly be forced to work in the informal
sector, where wages and other working conditions are
generally worse.
 Export restrictions may also make it more difficult for
poor countries to grow their way out of poverty.
The Gender Gap: Women and Education
♣Young females receive considerably less education than
young males in almost every developing country.
 Even in recent years women's enrollment in primary and
secondary education was lower than that of men.
 This educational gender gap is the greatest in the poorest
countries and regionally in the Middle East and North Africa.
Even though progress has been made recently, a substantial
gender gap persists.
 When economists speak of the “gender gap” these days,
they usually are referring to systematic differences in the
outcomes that men and women achieve in the labor
market.
 Cont…
Why is female education important? Is it simply a
♣
matter of equity?
 The answer is that there exists ample empirical evidence that
educational discrimination against women hinders economic
development in addition to reinforcing social inequality.
♣Studies from around the developing world consistently
show that expansion of basic education of girls earns
among the very highest rates of return of any
investment-much larger, for example, than most public
infrastructure projects.
 Thisis one reason why discrimination against girls in education,
as well as health, is not just inequitable but very costly from the
standpoint of achieving development goals.
 Cont…
♣Education of girls has also been shown to be one of the most costs
-effective means of improving local health standards.
 Studies by the United Nations, the World Bank, and other
agencies have concluded that the social benefits alone of
increased education of girls is more than sufficient to cover its
costs-even before considering the added earning power this
education would bring.
♣Greater mother's education generally improves prospects for both
her sons' and daughters‘ health and education.
 Studies show that mothers' education plays a decisive role in
raising nutritional levels in rural areas. The level of child
stunting, a valid indicator of child undernutrition, is much lower
with higher education attainment of the mother at every income
level. They note that this is almost ten times the projected impact
of a 10% increase in per capita income.
 Cont…
• Evidences show that increases in family income do not automatically result in
improved health status or educational attainment.
 If higher income cannot be expected to necessarily lead to higher health and
education, there is no guarantees that higher health or education will lead to
higher productivities and incomes. Much depends on the context, on whether
gains from income growth and also the benefits of public investments in health
and education and other infrastructure are shared equitably.
• Closing the educational gender gap by expanding educational opportunities
for women is economically desirable due to four reasons:
1. The rate of return on women's education is higher than that on men's in most
developing countries.
2. Increasing women's education not only increases their productivity on the
farm and in the factory but also results in greater labor force participation,
later marriage, lower fertility, and greatly improved child health and
nutrition.
3. Because women carry a disproportionate burden of poverty, 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.
 Educational Systems and Development
♠ The term “education system” includes all institutions which
are concerned with the education of children, young person
and adults in particular primary school, secondary school,
vocational upper secondary school, general upper secondary
school and on tertiary level polytechnics or universities.
Focus on;
 Laws, policies, and regulations
 Public funding, resource allocations, and procedures for
determining funding levels
 State and district administrative offices, school facilities, and
transportation vehicles
 Human resources, staffing, contracts, compensation, and
employee benefits
 Books, computers, teaching resources, and other learning
materials
 And countless other contributing elements
Cont…
♠ Much of the literatures and public discussions about
education and economic development in general, and
education and employment in particular, revolve around
two fundamental economic processes.
1. The interaction between economically motivated demands
and politically responsive supplies in determining how
many school places are provided, who gets access to these
places, and what kind of instruction they receive.
2. The important distinction between social and private
benefits and costs of different levels of education and the
implications of these differentials for educational
investment strategy.
 1. Educational Supply and Demand
♣Theamount of schooling received by an individual is determined by
demand and supply, like any other commodity or service.
♣Most education is publicly provided in less developed countries so the
determinants of the amount demanded turn out to be much more
important than the determinants of supply.
♣ On the demand side, the two principal influences on the amount of
schooling desired are
1. A more educated student's prospects of earning considerably more income
through future modern-sector employment (the family's private benefits of
education) and
2. The educational costs, both direct and indirect, that a student or family must
bear.
♣The amount of education demanded is derived demand for high-wage
employment opportunities in the modern sector.
o Because access to such jobs is largely determined by an individual's education.
o Most people (especially the poor) in less developed nations do not demand education for
its intrinsic non-economic benefits but simply because it is the only means of securing
modern-sector employment.
 Cont…
• On the supply side, the quantity of school places at the primary,
secondary, and university levels is determined largely by political
processes, often unrelated to economic criteria.
• The public supply of these places is fixed by the level of government
educational expenditures and by the level of aggregate private demand
for education.
Because it is the amount of education that is demanded that largely
determines the supply let us look more closely at the economic
determinants of this derived demand.
• The amount of schooling demanded that is sufficient to qualify an
individual for modern-sector jobs is determined by the combined
influence of four variables: the wage or income differential, the probability
of success in finding modern-sector employment, the direct private costs of
education, and the indirect or opportunity costs of education. Although by
non-economic variables such as cultural traditions, gender, social
status, education of parents, and size of family.
2. Social Versus private benefits and Costs
• Typically in developing countries, the social costs of education
increase rapidly as students climb the educational ladder.
o The private costs of education increase more slowly or may
even decline.
o This widening gap between social and private costs provides
an even greater stimulus to the demand for higher education
than it does for education at lower levels.
oMore and more resources may be misallocated to educational
expansion in terms of social costs, and the potential for
creating new jobs will consequently diminish for lack of public
financial resources.
 Cont…

• Expected private returns and actual private costs are plotted against years of
completed schooling. As a student completes more and more years of schooling,
expected private returns grow at a much faster rate than private costs. To
maximize the difference between expected benefits and costs, the optimal
strategy for a student would be to secure as much schooling as possible.
 Cont…

• The social benefits curve rises sharply at first, reflecting the improved levels of
productivity of, say, small farmers and the self-employed that result from receipt of a basic
education and the attainment of literacy, arithmetic skills, and elementary vocational skills.
Thereafter, the marginal social benefit of additional years of schooling rises more
slowly, and the social returns curve begins to level off. By contrast, the social cost curve
shows a slow rate of growth for early years of schooling (basic education) and then a much
more rapid growth for higher levels of education. This rapid increase in the marginal
social costs of post-primary education is the result of both the much more expensive capital
and recurrent costs of higher education (buildings and equipment) and, more important, of
the fact that much post-primary education in developing countries is heavily subsidized.
 Cont…
• The optimal strategy from a social viewpoint, the one that
maximizes the net social rate of return to educational investment,
would be one that focuses on providing all students with at least B
years of schooling. Beyond B years, marginal social costs exceed
marginal social benefits, so additional public educational
investment in new, higher-level school places will yield a negative
net social rate of return.
• Generally, Private Versus Social Benefits and Costs of Education
analysis illustrates the inherent conflict between optimal private
and social investment strategies-a conflict that will continue to
exist as long as private and social valuations of investment in
education continue to diverge as students climb the educational
ladder.
• To a large degree, the problem of divergent social versus private
benefits and costs has been artificially created by inappropriate
public and private policies with regard to wage differentials,
educational selectivity, and the pricing of educational services.
 Cont…
However, there are two fundamental economic reasons why one
might suspect that many developing countries educational
systems are inherently not egalitarian, in the sense that poor
students have less chance of completing any given educational
cycle than more affluent students.
o First, the private costs of primary education are higher for poor
students than for more affluent students.
oSecond, the expected benefits of 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.
 Role of Education for Economic Growth
In general, it is clear that the expansion of educational
opportunities at all levels has contributed to aggregate economic
growth by
1. Creating a more productive labor force and endowing it with
increased knowledge and skills.
2. Providing widespread employment and income-earning
opportunities for teachers, school and construction workers,
textbook and paper printers, school uniform manufacturers, and
related workers.
3. Creating a class of educated leaders to fill vacancies left by
departing expatriates or otherwise vacant positions in
governmental services, public corporations, private businesses,
and professions.
4. Providing the kind of training and education that would promote
literacy and basic skills while encouraging "modern" attitudes on
the part of diverse segments of the population.
 Health System and Development
Health and Productivity
 The existing evidences show that health and nutrition do affect
employment, productivity, and wages and very substantially so
among the poorest of the poor.
oThis evidence 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.
oAfter 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.“
oA healthy population is a prerequisite for successful
development.
 Health Systems and Policy
•A health system, also sometimes referred to as health care system
is the organization of people, institutions, and resources that deliver
health care services to meet the health needs of target populations.
• In the WHO’s (World Health Organization) definition, a health
system is "all the activities whose primary purpose is to promote,
restore, or maintain health.“
oHealth systems include the components of public health
departments, hospitals and clinics, and offices of doctors and
paramedics.
o Outside this formal system is an informal network used by many
poorer citizens, which includes traditional healers, who may use
somewhat effective herbal remedies, or other methods that
provide some medical benefits.
 Cont…
According to WHO, there are five performance indicators to
measure health systems in the WHO member states:
1. The overall level of health of the population.
2. Health inequalities within the population.
3. Health-system responsiveness (a combination of patient
satisfaction and system performance).
4. The distribution of responsiveness within the population (how
well people of varying economic status find that they are served
by the health system).
5. The distribution, or fairness, of the health system’s financial
burden within the population.
In addition to its direct positive effect on national health standards,
basic health is also an effective means to achieve goals of poverty
reduction.
 Calculations of benefits of health investments need to keep these
long term spillovers in mind.
 Cont…
• An effective government role in health systems is critical for at
least three important reasons.
oFirst, health is central to poverty alleviation, because people
are often uninformed about health, a situation compounded
by poverty.
oSecond, households spend too little on health because they
may neglect externalities (such as, literally, contagion
problems).
oThird, the market would invest too little in health
infrastructure and research and development and technology
transfer to developing countries due to market failures.
Policies for Health, Education and Income Generation

• In the coming years, the clear evidence that health and education
are joint investments may offer scope for a more integrated policy
approach.
• It may be that one of the most effective investments we can make
in education quality is to improve child health.
• Similarly, one of the most effective investments we could make in
health may be to improve the quality of education.
• In fact, a number of prominent poverty programs in developing
countries now explicitly integrate incentives for the development
of health and education human capital among low income
families.
• Integrated strategies seek linking highly successful micro
credit systems with health and education. Integrating program
on education, health and nutrition is another good strategy.
T he end of chapter two!!