UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

First Semester
A.Y. 2023-2024

COURSE LEARNING MODULE

ECON 1023 – Economic Development

Prepared by:

GLADYS T. TUMBALI, DBM

ECON 1023-Economic Development | 1

 School of Accountancy, Business and Hospitality
Business Administration Department
Curriculum 2018-2019

COURSE LEARNING MODULE

ECON 1023 (Economic Development)
AY 2023-2024

Lesson 16 and 17: Human Resource Development

Topic: Economics of education

Education in Asia
General Issues in Education Policy
Health and Economic Development
Public Health policies and the Asian

Learning Outcomes: At the end of this module, you are expected to:

- Define economics of education;

- Describe education in Asia and the general issues in education policy;
- Understand the relationship between health and economic development;
- Identify public health policies and relate it with the Asian experience.

LEARNING CONTENT

Introduction:

In recent years, development economists have begun focusing on human resources as a vital
component in stimulating rapid economic growth. While physical capital and natural endowments of land and
resources are also important, human resources play a critical role in bringing about the structural and
technological transformations that are required to industrialize and raise per-capita incomes rapidly. People,
not machines, make the crucial decisions that result in improved allocation of resources and the
implementation of new technology. They save and invest in new technology and infrastructure, and also decide
how resources are to be used and mobilized. It is therefore critical that these human resources be developed
and nurtured to ensure that they are capable of making these important decisions.

Human capital is defined as human capacities that raise productivity. Labor productivity increases in particular
are essential for sustained growth in the economy. The improvement of human capital has therefore become a
prime objective in economic development in many countries, including those in Asia. The main channels of
intervention are through the provision of education and better health and nutrition. A well-educated, highly-
skilled and healthy citizenry makes for a highly productive workforce. Investments in human capital
accumulation can only lead to increased income and improved standards of living.

Hence, the policy imperative for Asia is one of pursuing economic growth and development alongside
continued investment in its people through the provision of education and better health. Human capital
investments in health and education are an effective mechanism for bringing marginalized groups into the
mainstream. Such human capital investment not only provides people with better skills to participate in the
economy, but also gives them greater capacity to deal with external shocks and to pursue choices that are
welfare enhancing for themselves and those around them. There is widespread evidence that education is one
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of the most prominent determinants of movements out of chronic poverty. Health-related shocks, on the other
hand, push people into poverty. The growth elasticity of poverty is another important consideration in terms of
the impact of growth. Empirical evidence suggests that the impact of economic growth on poverty is greater
with higher levels of human capital. For example, evidence from lndian state-level data indicates that, although
growth was associated with poverty reduction, the extent to which poverty declined varied substantially
between states The higher the level of public expenditure on development and basic education and health, the
greater the responsiveness of poverty to growth (Ravallion, 2001, 2004).

This chapter focuses on how the Asian economies have been able to undertake such investments and how
resources have been devoted to the task of raising educational attainment and improving health to
complement the growth of physical capital and adapt to a dynamic economic environment, both domestically
and internationally. We will also discuss some of the issues and challenges faced by these Asian economies in
their efforts to provide health and education services for their populations.

Lesson Proper:

THE ECONOMICS OF EDUCATION

Education can be defined broadly as any or all forms of human learning. It can be formal, involving a
schooling system with a structured program, using textbooks and having lessons within the confines of a
classroom. It can also be informal, where knowledge is acquired in a very unstructured way, as children learn
from their parents and relatives, or through apprenticeship schemes that teach a trade. Children learn planting
techniques and other skills in the fields as they watch their elders, and eventually become part of the
agricultural community as a result of this kind of informal training. In this chapter, however, we focus on formal
education, which has been the principal mechanism for developing human skills and knowledge over the past-
few centuries. This is what we refer to as education in this chapter. It includes primary, secondary, and tertiary
education.

A rapid expansion of the public educational system occurred worldwide from the 1960s onwards, as
governments in both developed and developing countries became convinced that the provision of educational
opportunities to the largest possible section of the population was a critical component for national
development. Many countries in the developing world made a commitment to provide universal primary
education and also to make a sustained effort to spread education more widely at the secondary level.

Several factors led to this approach. First, there was mounting empirical evidence that educational attainment
and economic growth and development were closely related. On a microeconomic level, this was reflected by
the high correlation between educational attainment and earnings for a whole range of occupations in many
countries ( Psacharopoulos, 1994). It is no wonder then that governments have been willing to spend a
significant proportion of their national incomes on public education. In the same way, it is also not surprising
that parents became more willing to devote a larger part of their disposable income to the education of their
children. At the macroeconomic level, it was reflected by a significant relationship between increases in
expenditure on education and the level of educational attainment and rates of growth in income in several
countries Furthermore, the developing countries were able to observe that educational levels were much
higher in the industrial countries and that this was one reason why they were able to continue to develop new
technologies and increase productivity.

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Factors Affecting Spending on Education

Growth in demand for public education is partly a result of growth in real income per capita. The income
elasticity of public expenditures on primary and secondary education has been estimated to be around 1.5,
suggesting that when incomes double, spending on education will rise by 150 percent (Schultz, 1988). The
education process is labor-intensive by nature, but studies have consistently shown that productivity has not
increased much in this sector. Additionally, there has been a decline in teacher salaries relative to average
incomes in many countries. The low remuneration has clearly helped to keep the cost of education at the
primary and secondary levels affordable, but if the trend continues, the teaching profession may in the long run
find it difficult to attract enough highly motivated and capable individuals. Certainly, keeping the balance
between the quality of teachers and the cost of providing education is a huge challenge for policymakers.

In the developing countries, the rapid growth of the population has resulted in a substantial increase in the
number of school-age children. This has placed a heavier burden on the carrying capacity of school systems,
which has resulted in split shifts, a reduction in the expenditures per student, larger classes, and shared text
materials in some cases. Given the limited resources and the large demand for public educational services in
the developing countries, many conclude that the quality of public schooling has deteriorated in many of these
countries in the past few decades.

In some developing countries, the shortfall in the supply of educational services relative to demand has led to
the growth of privately funded schools. Some policymakers favor such developments not only because it takes
the pressure off the public purse, but also because many economists and policymakers believe that a privately
run school system is more responsive to shifts in demand and other economic forces than a public education
system.

There is a risk, however, that a private school system may perpetuate the maintenance of social elites as the
rich would send their children to better private schools and the poor would have to be satisfied with an inferior
public school system. As a result, in many developing countries where private education has been allowed to
flourish, this twin system of providing educational services to the population has led to inequalities in “quality,”
a dichotomy that continues into the provision of tertiary level education. It also affects employment outcomes
as employers in such developing countries tend to favor graduates of private schools over their public school
counterparts.

EDUCATION IN ASIA

In most nations in the Asian region, the rapid expansion of educational opportunities is seen as a key
strategy toward sustained growth and long-term national development. Resources have, therefore, been and
continue to be expended so that enrolment rates are continuously improved and literacy rates increased, in line
with the general commitment of providing universal education in the shortest possible time. The country’s
income per capita and its dependency ratio are the two important variables that play central roles here. Per-
capita income and dependency ratio jointly determine the educational attainment of the population at any point
in time. In other words, these variables are the critical determinants of the economy’s ability to lift the average
educational attainment of its population.

The Population Factor

Economic growth and changes in fertility have been dramatic in Asia in the past fifty years as we have
seen in previous chapters. An interesting aspect of this dynamism has been the changing relationship between
the number of dependent or non-working members of the population (those aged under 15 and over 65 years),
and the number of people in the labor force (those aged between 15 and 65 years). In the 19705, the
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dependency ratio in Asia averaged about 51 (ranging between 46 and 56; see Table 11.1), that is, there are
about 51 dependents for every 100 workers. This is a high ratio which is reflective of the young and rapidly
growing populations in these Asian nations. These ratios in Asia are also high compared with those found in
the more advanced economies of Europe and North America. Dependency ratios have gradually decreased
since then, owing to dramatic falls in population growth rates occurring over time. The decline has been
highest in the relatively richer Asian countries, such as Korea and Singapore, as is evident in Table 11.1.
Table 11.1 Dependency Ratios for Selected Asian Economies

Educational Spending

Spending on education absorbs a much larger proportion of government budgets than most other
expenditures. It is thus important that we study the allocation of resources to this sector. The budget share of
educational expenses to GDP has steadily increased for most countries in Asia over time. In the 1960s, the
share of education in GDP ranged from less than 1 percent in Nepal and Bangladesh to as much as 3.09
percent and 3.74 percent in Singapore and Sri Lanka, respectively. By the mid1990s, the education sector’s
share in GDP averaged about 3.2 percent, with Thailand and Malaysia standing out as having the largest
shares of more than 4.6 percent of GDP, and very comparable With those seen in Australia, Japan, and the
United Kingdom. In the 2002-2005 period, this share of education continued to rise for many countries, led by
South Korea (its share increased to 4.6 percent from 4.07 percent seven Years earlier), and Malaysia (its
share increased to 6.2 percent from 4.62 percent over the same period). The share of education in Malaysia’s
budget is now above those of the major industrialized countries, except for New Zealand, which had 6.5
percent share during 2002'2005 (see Table 11.2). There appears to be a weak correlation between an
increase in per capita income and a nation’s share of the budget for education.
Table 11.2 Public Spending for Education as Percent of GDP, 1960-2005

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Trends in Enrolment Ratios

Looking at enrolment rates over the past fifty years, a number of developments are evident (see Table
11.5). Firstly, primary education has become quite universal in most countries. However, the quality of this
education can vary substantially and the figures in some instances seem high, since by walking around in any
of the major cities in South Asia, it is obvious that the 100 percent figure is an over statement. Furthermore,
over aged students and repeaters tend to distort the enrolment numbers at the Primary level (see Table 11.6
for actual educational survival rates from grade four to grade five). These survival rates in education are
closely related to levels of per-capita income, suggesting that the efficiency of education is highly correlated
with income per capita (see Figure 11.3).
Table 11.5 Gross Enrolment rates by Level of Schooling

Table 11.6 Survival Rates in Primary School

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 Figure 11.3

The data in Table 11.5 also show that the NIEs started in 1950 with a very strong primary education base but
so did a few other countries such as Sri Lanka and the Philippines, which now have much lower per-capita
incomes. We have noted this in earlier chapters and speculated on the reasons that they were not able to
capitalize on a strong primary education base, as did the NlEs. Bangladesh and Pakistan, on the other hand,
stand out as countries that have made little progress in education generally. Note that right after World War II,
there was much less disparity in per-capita incomes, but the gap has increased over time. Could the
divergence in income in subsequent decades be partially the result of a stronger commitment to education by
the NIEs?

Rates of Return to Education

Table 11.7 shows the rates of return to education in Asia culled from a number of separate studies, as
reported by Mingat and Tan (1992). As expected, the returns are higher for primary education and lower for
higher levels of education. However, these results do not show the intrinsic value or merit good of education
that would be reflected by higher social rates of return vis-a-vis private rates of return. Perhaps this is because
the countries examined for which both rates of return were calculate are at the poorer end of the income scale.
It may also be that tertiary education is not considered a merit good.
Table 11.7 Rates of Return to Education

Another recent study by Cohen (2002) compares the rates of return to education together with experience. The
approach follows that originally developed by Mincer (1974). The rates of return to education in Asia are nearly
identical to those in the United States for the period of the 1980s and 1990s, at just under 10 percent. The
returns for the first year of experience are somewhat higher in Asia-about 4 percent versus 3 percent in the
ECON 1023-Economic Development | 7
United States. This study also concludes that the rates of return in poor countries have risen in the past few
decades, contradicting the conventional wisdom that poor countries would experience a decline in returns to
education as globalization raises the demand for low-skilled workers in these countries. Rather, the openness
to globalization raises the returns to education in the poor countries since the flow of technology enables many
of them to begin manufacturing skill and capital-intensive products that require more highly skilled and
educated labor.

Gender Disparities in Educational Attainment

Gender disparities exist at all levels of education for most countries, but they tend to fall as incomes
rise, as do literacy differentials. Only the results for South Asia (such as Bangladesh, India, and Pakistan)
show a highly skewed pattern of discrimination against women. A Similar skewness is observed in the girls-to-
boys enrolment ratio, by the level of schooling, as shown in Table 11.8 although in several Southeast Asian
countries, such as Malaysia and the Philippines, the enrolment rate for tertiary education has been higher for
females than for males.
Table11.8 Girls-to-Boys Ratio by Level of Schooling

GENERAL ISSUES IN EDUCATION POLICY

There is no doubt that education plays a very important role in the economic development of nations.
We have outlined above some of the important aspects of education provision, but there remains much more
to say. In this section, we discuss a few other important issues that are directly relevant for policymakers.

Greater Privatization of the School System

An argument can be made for greater privatization of the school system by allowing private schools to
coexist with public schools. This gives students greater choice and also helps to promote competition between
public and private schools. A study of the Philippines by Jimenez (1987) shows that administrators in private
schools who are financed by local funds have greater incentive to minimize costs while maintaining quality.
The provision of a private-school alternative also helps to reduce the budget burden on the public purse as a
result of these competitive factors. For example, in Asia as a whole the index of private-school financing and
the index of costs per capita for higher education are inversely related (see Figure 11.4). However the curve
flattens out at about 40 percent financing. Perhaps there is a range of funding for tertiary education by the
private sector of around 50 percent. At higher rates of private financing of higher education, the social
selectivity of a totally privately funded hi her education system will work to exclude the poorer segments of
society. Studies in the Philippines and China also show that the unit cost of education tends to fall with the size
of enrolment in the school. This is true for both secondary and tertiary education.

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 Figure 11.4

The proliferation of private schools, however may exacerbate existing income and wealth inequities within an
economy. Poorer families tend to send their children to public schools, while more affluent families send their
children to private schools. While there are economically justifiable reasons for allowing private education
systems to flourish, this dichotomy drives a wedge between graduates of “public” and “private” education
systems, and does affect labor market outcomes as employers tend to favor graduates of private schools more
than their public-school counterparts.

Teacher’s Pay, Class Size, and Educational Efficiency

There is also evidence that efficiency improves as the student-to-teacher ratio increases up to a point.
A study by Leroy (1995) shows that the pupil-teacher ratio does not have much effect on educational outcomes
when the range is 25 to 50 pupils per teacher. At the same time, the pupil-teacher ratio tends to decline with
higher income. Therefore, it may be a good strategy for poorer countries to increase class size while improving
teacher quality. As incomes and education budgets increase, they can gradually reduce class size.

Surprisingly, teachers’ wages are not highly correlated with the level of economic development.

The NIEs have also performed very well in internationally standardized tests administered in a number of
industrial and developing countries (see Tables 11.9 and 11.10).
Table 11.9 Scores on Internationally Administered Competence Tests

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 Table 11. 10 Science and Mathematics Average Scores at Age 14

A tentative conclusion that can be drawn from the above results is that the strategy followed by the NIEs to pay
higher wages to teachers and to have larger class sizes led to more efficient education. Higher test scores in
Korea and Singapore reflect this. Whether such a strategy would benefit other countries would have to be
studied carefully because of the differences in local conditions. However, prima facie, it seems to be a good
starting point for reform. In Indonesia, Thailand, and the Philippines, the results of internationally administered
tests were less satisfactory, providing further evidence that the approach followed in East Asia has been more
efficient and productive.

Quality versus Quantity of Education

The rapid increase in demand for educational services has been based on the notion that having more
years of schooling is more likely to boost one’s earnings in the labor market. Furthermore, there is some
evidence that past a certain threshold of income, there is bound to be greater substitution between the quantity
and quality of education obtained. How much of the variation in earnings is a result of quality differences? A
related point is the family background of the student. It is important to recognize that all three of these variables
are probably highly correlated in most samples-that is, higher quality, higher quantity, and “good” family
background tend to go together. Thus, the returns to education have to be interpreted carefully. Simply offering
to extend the same quality of education to a wider cohort will probably give a lower rate of return than
estimates based on data where all three variables are changing over time. This is because some of the
increase in wages/earnings will be attributed to the increase in quantity of education, whereas the quality of
education and the background of the student will also be important determinants of earnings on their own
account. Moreover, studies conducted with panel data suggest that a pupil’s home environment and social
status are much less important in developing countries than it is in developed countries. These studies also
show that the variation in academic achievement attributable to factors internal to the school system, such as
the physical infrastructure and facilities, the quality of the teachers, and the availability of books, and other
teaching materials and facilities, play a much more important role in the developing world than it does in
developed countries. Despite these caveats, there is still a strong economic and social incentive to invest in
education. These findings also reinforce the conclusion that greater emphasis should be put on providing good
facilities and teachers.

Tertiary Subsidies and the Brain Drain Problem

Tertiary education tends to be much more costly relative to primary education in developing countries
than it is in developed countries. For example, tertiary education per pupil in India costs 50-100 times more
than that for primary education (Mingat and Tan, 1992). The wage differentials between the tertiary graduate
and those who obtained less years of schooling tend to be higher in developing vis-a-vis developed countries.
It was also pointed out earlier that the external benefits of education diminishes with more years of schooling-
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that at higher levels of education, greater benefits accrue to the individual more than to the society. This reality
must be recognized by policymakers in developing countries where large subsidies are often given to higher
education, which tend to have a regressive effect on the taxation system. An associated problem is the
phenomenon called “brain drain” (see Box 11.1). When higher education is subsidized and there is
international labor mobility, there is likely to be a larger “brain drain” problem. This wastes public resources and
indirectly provides a subsidy to the richer country, which does not have to spend on training for the immigrant.
The solution is to reduce the subsidy to higher education dramatically.

MORE ON THE ”BRAIN DRAIN” .It is generally observed that the better educated are the most likely to
migrate. In the early stages of development, rural to urban migration is more attractive to the more educated
agricultural workers. This is because real wages are generally higher in the urban areas. This increased
tendency to migrate occurs not only within national boundaries, but also internationally. This is exacerbated by
a situation where there are too many highly educated citizens who cannot find employment locally that is
commensurate with their qualifications. These issues are discussed further in Box 11.1.

Inequality Effects and Missing Credit Market

The educational levels and quality of education in Asia vary widely among countries. The policies that an
individual country follows at a particular time will depend upon the status of the existing system. In many
instances, the existing system tends to perpetuate the education of the ruling class and discriminate against
the education of “gifted” poor children, particularly in rural areas where hunt for primary education may be
weak.

A balance needs to be struck between the different objectives of a subsidized education. If there is great
inequality in the redistribution of income, more generous subsidies may be given to gifted students, even at the
tertiary level. In a comparative study of Kenya and Tanzania, Armitage and Saba (1986) found that higher
school fees in Kenya resulted in a higher secondary enrolment. This could have helped Kenya to achieve more
rapid development than Tanzania, which followed a policy of keeping secondary education free but reduced
enrolment by test screening. To understand how these policy issues apply in particular countries, we have to
understand the existing educational system in these countries and assess the quality of the education
provided.

One way to address the inequalities raised above is through the development of a well-functioning credit
market. Low levels of wealth hinder or even bar productive educational choices because of the failure of credit
ECON 1023-Economic Development | 11
markets. For the poor, educational loans are difficult to obtain because of a lack of collateral. In India and
Thailand, there seems to be a working credit market for education-but it may still be inaccessible to the poorest
income groups.

Implications for Policy Based on the above analysis, we can draw five tentative policy conclusions:

1. Curbing population growth means lower dependency rates and increases the ability of the society to
educate its population with the same resource base.

2. It pays to educate teachers more intensively and to pay them well, even at the expense of having
slightly larger classes.

3. It is advantageous to spend on education for girls and primary education in general investment in
these areas shows high payoffs, both in social and private returns.

4. It pays to encourage private providers of tertiary-level education and possibly at the secondary level
as well if they do not already exist.

5. Experiments with higher pupil-teacher ratios and decentralization of authority over school
management, the curriculum, and the budget, may also be advantageous.

HEALTH AND ECONOMIC DEVELOPMENT

Health is a very important component of development. Ensuring the general health of the people
around the world is the overriding concern of international agencies such as the World Health Organization
(WHO). Understandably, there are personal gains from having good health but organizations such as the WHO
and national governments also recognize that the general health of the citizenry is an important element in
national development.

In this module, we define health as the overall well-being of an individual. This definition covers the physical,
mental, and social state of the person and is essentially the definition used by the WHO and other international
agencies. In simple terms, health means the absence of illness and infirmity. That said, there will be instances
when we use “health” to refer to the general well-being of the population. In this context, we talk about
morbidity and mortality rates, which refer to the chances of a person becoming sick or dying (presumably due
to illness), respectively. The former is a difficult statistic to measure, as trips to the doctor are the only available
information that can be used to estimate this probability for the population. However, not everyone sees a
doctor when they fall ill. In the developing countries, this problem is worse since access to medical services
can be remote. The measurement of morbidity may also be complicated by the gravity or seriousness of the
illness being reported. In contrast, mortality rates can be and are more closely monitored. In most countries,
the national statistical agencies maintain databases of births and deaths in the economy, and their regular
publications contain these statistics for the year. Statistics on the causes of death also provide important clues
to the general well-being of the population and, as such, can be used to form another set of health measures.
Unfortunately, these sets of information are not always available or reliable.

Other statistics are also commonly used, such as infant mortality, life expectancy at birth (number of years a
person is expected to live), crude birth rates and, of course, crude death rates.

A healthy population is an important ingredient for economic growth and development. Good health increases
the worker’s strength and stamina and enables him/her to work longer hours and concentrate more effectively.
There is little argument that a healthy and fit workforce is better able to increase national productivity. Good
health is also known to improve the performance of children in school. When children are well fed, they tend to
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have a longer concentration span, absorb what is taught more effectively, and are generally able to participate
better in class activities.

Besides increasing the quantity and improving the quality of human resources, health expenditures can also
extend the availability or productivity of non-human resources. The clearest example is the large tracts of land
rendered inhabitable or unusable by endemic diseases. Malaria and typhoid fever blocked access to many
parts of Latin America, Africa, and Asia before these diseases were brought under» control in the twentieth
century. Even today, schistosomiasis makes it unsafe for people to enter lakes and streams in sections of
Africa, and trypanosomiasis (an African sleeping sickness) restricts the range of the livestock industry. So far,
no chemical means of control have been discovered for either of these diseases. China, however, has made
progress against schistosomiasis through mass campaigns aimed at ridding lakes and streams of the snails
that transmit the parasite. The success of such efforts can substantially enhance productivity and increase the
amount of arable and habitable land.

Aspects of Health in Developing Countries

While the good health status of the population is essential for economic growth and development, the
pursuit of good health for every citizen is an important goal in its own right. It must be recognized recognize
that decisions to invest in health should not primarily depend on whether it has high rates of economic return.
Good health increases the human potential in all areas and is rightly regarded as a basic human need.

In this section, we discuss three main aspects in the context of their implications for policy: (a) environmental
health; (b) malnutrition and food consumption; and (c) medical services.

ENVIRONMENTAL HEALTH One effective approach toward better health outcomes in deve10ping countries
is through the improvement of environmental sanitation. In many developing countries, the spread of infectious
and parasitic diseases can be effectively controlled by ensuring that people have access to clean water and
the provision of an adequate waste disposal system. Experience has shown that such measures have
effectively controlled the spread of waterborne diseases such as typhoid, dysentery, and cholera. Improving
housing conditions-with better ventilation and space-can also minimize the spread of tuberculosis. Health risks
for these diseases are exacerbated by the presence of urban slums, especially in developing countries. These
are pockets within a city that are highly populated by the poor and housing conditions are very cramped.

MALNUTRITION AND FOOD CONSUMPTION A person suffers from malnutrition if his/her food Intake does
not meet minimal nutritional requirements for the physical body’ to function well. In most developing countries,
malnutrition simply means not having enough food to eat. It is a major cause of ill health and premature death.
Having the right amount and kind of food for the young is very important as they are still growing Inadequacies
in their diets affect their physical and mental development and this will affect the quality of the adult population
in the future.

What causes malnutrition and how can nutritional improvements contribute to economic development? The
consumption of food, like any other goods or services, is determined by three elements: income, prices, and
tastes.

Income

Engel’s law says that poorer households devote a greater proportion of their budget to food and that
they have a relatively high income elasticity of demand for food. This means that any additional income
will be used to purchase food for the household. At higher income levels, the budget share of food
declines in favor of other goods and services. Income, therefore, is an important indicator of food

ECON 1023-Economic Development | 13

 consumption levels, particularly at lower levels of household income. There is, nonetheless, recent
research showing that an increase in income is not a guarantee that the general calorific intake of the
population will increase because of the substitution effect that occurs-substitution for tastier, better
quality, or wider variety of food, rather than on more calories.

Prices

There is a much evidence accumulated from household studies showing that the poor are very
sensitive to changes in the prices of a food basket and they tend to make strong substitutions when
prices change. How does this relate to the nutrition content of this food basket? If we derive a demand
function for nutrition rather than the food bundle itself, a number of unexpected conclusions can be
drawn from the literature. This happens because of strong cross-price substitution effects among
different foods together with variations in nutrient-to-food conversion ratios. For example, if the price of
rice increases, we would expect the nutrition content of the diet of the poor to decrease, other things
being equal. However, what happens is that there is a sufficiently large increase in the demand for
other relatively nutritious foods to offset the decline in nutrition resulting from the fall in rice
consumption.

A related point is the response of the poor versus the rich to price changes. Own price elasticities are
much higher for the poor than for the rich (for cereals, close to negative one for the poor, and near zero
for the rich, according to one study). Within households, female children are generally made to accept a
greater nutritional burden of adjustment when there are unfavorable price movements. The nutrition of
others in the family moves much less.

Taste

Cultural beliefs and tastes in the consumption of particular types of food can impede nutritional
improvement. Many traditional societies have beliefs about the health effects of various food5 that are
not supported by modern nutritional science. More often than not these beliefs can be harmful to the
health of certain segments of the population. Soybean products, for example, have been found to be a
cheaper source of protein than animal products yet their potential as a primary provider of this much
needed nutrient in the household diet is yet to be fully exploited in the poor countries of Africa or South
Asia, where meat is still preferred.

MEDICAL SERVICES Medical facilities and services in the developing countries are very inadequate in
providing for the health needs of the growing populations. Table 11.14 shows indicators of health care facilities
for selected countries in the Asian region for percentages of populations with access to health care). For a
start, public expenditure on health in developing countries has always lagged behind those for education,
defense, etc. Furthermore, compared to developed countries, these health expenditures are very low, even as
a percentage of GDP (see Table 11.15). This has resulted in a stock of medical resources-facilities and
personnel-that are far from adequate for the needs of the population. There are usually long queues in the few
established health centers, insufficient medicine supplies, and a lack of trained health personnel to support
these services. The number of physicians willing to practice in the public sector is also limited because many
doctors are lured by the prospect of higher income in private practice.

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 Table 11. 14 Health Care Facilities in Selected Asian Countries, 2000

Table 11. 15 Public Spending on Health as Percent of GDP, 1990-2005

In addition to inadequate supply, health services in developing countries are also unevenly distributed with
large urban-rural differentials in the quality of services provided. On the one hand, there is a strong drive to
acquire the latest medical technology to make the domestic capacity comparable to Western economies. Thus,
much is spent on medical machines that support, for example, open-heart surgery. This usually happens in the
cities, where the interests of the urban elites are satisfied. On the other hand, rudimentary medical care to sick
infants and children is woefully inadequate, particularly in the rural areas of the country.

In addition, the developing countries spend far more resources on curative health care when it is well known
that preventative health care is the more sensible approach.

ECON 1023-Economic Development | 15

 PUBLIC-HEALTH POLICIES AND THE ASIAN EXPERIENCE

The World Health Organization’s Commission on Macroeconomics and Health released an assessment
of the health conditions in developing countries in 2001 (WHO, 2001). Among their findings were that mortality
rates for children under 5 years old in the poor economies (under US$1,000 per-capita income) are nearly
twenty times higher vis-a-vis the rates in the rich economies (over US$20,000 per capita income). The report
provides strong evidence that better health raises the productivity of labor and the level of wages, and that as
health improves and wages increase, the health of women also improves, which in turn results in better health
and education outcomes for their children. In the end, the report recommends greater investment in the health
programs because improved health definitely promotes more rapid growth.

The experience of the developing countries in Asia supports these conclusions. Table 11.16 compares the
rates of growth in real per-capita income between 1965 and 1999, with different initial per capita incomes and
initial infant mortality rates (IMRs) for 1965. These comparisons show that much higher rates of growth were
achieved by countries with low IMRs in 1965 than by those with high IMRS (5.4 percent versus 1 percent).
Table 11.16 Growth Rate in Per Capita Income(1965-1999). . .

Subsidies and Nutrition

There appears to be a mismatch in the food products that are subsidized and those food products that
the poor consume. Studies have shown that meats, poultry, and dairy products have been given some
subsidies in several developing countries. However, these products are too costly for the poor to consume. If
subsidies are to be given, they should be for grains such as rice and wheat, which are most heavily consumed
by the poor.

Raising Incomes through Direct Transfers

Raising incomes through direct transfers does not necessarily improve nutrition and health while this
point is still being debated, there is some evidence that the income elasticity of nutrition expenditures may be
very small in some countries. In these cases it may be better to provide direct nutrition through a subsidy to
augment programs to raise the incomes of the poorest and most deficient groups.

Macroeconomic Effects

It is difficult to assess how macroeconomic adjustment policies have affected nutrition and health
outcomes. The evidence for adverse impacts is not strong. However, when economic growth falters for a
prolonged period, the health effects can be catastrophic. The experience of Russia in recent years is a case in
point. An analysis of the impact of the Asian financial crisis on health may also provide some useful insights as
to how public policy can be improved in the areas of health provision and services. Preliminary results suggest
that it may have more to do with the failure of the government’s health and delivery system to react promptly to
the crisis than with specific policies relating to health.

ECON 1023-Economic Development | 16

Charging Fees for Health Care

It has been discussed earlier that health care in developing countries is severely under-financed. Prices
have generally played a minor role in generating resources for financing health services or in determining
those who have access to them (Jimenez, 1987). According to recent estimates, only 7 percent of the cost of
publicly provided health services in developing countries is currently recovered through user fees. This has led
to proposals to increase the fees charged for health services and to institute charges for those who are
provided with free medical care. The revenue generated would be used to expand health services.

Jimenez (1987) recommends that we account for externalities generated by each type of health service. If the
externalities are large-that is, when society benefits significantly from the provision of one unit of service to an
individual or a household-then this type of health service must be provided below cost. However, if the benefits
from a particular health service accrue mainly to the individual in other words, when the externalities are low-
then the cost for this type of service should be borne by the individual. Broadly speaking, one will not want to
charge fees for preventative health care services, but one will want to charge a reasonably high price for
curative health care. If there is excess demand on these high-priced services, then prices can be further
increased. The revenues generated can then be reinvested in expanding services. If there is no excess
demand generated, then the effect of a fee increase on revenues and the level of services provided would
depend on the elasticity of demand for health services. Available evidence suggests that this demand is highly
inelastic, since some people regard some services-particularly curative services in health emergencies-as
necessities. Jimenez notes, however, that user fees for the highest cost services can be brought close to the
cost of providing them only if medical insurance is widely available, since few of the people unfortunate enough
to require such services are able to afford them.

In the context of a developing country where most households and individuals are not able to afford primary
health care for themselves and their family members, it is an uncomfortable thought that people will only be
provided with medical and health service if they can pay for some, if not all, of the cost of the service. More
often than not, those who use public-health services are the poor. Instituting charges for currently free services
will not matter much to the rich-they simply do not use them-but it will affect the poor greatly. In terms of policy,
governments should devote more resources to preventative care and improving environmental health so that
morbidity rates, particularly among the poor can be improved. If and when this happens, demand for
preventative health care services can be used.

*** END of LESSON ***

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ECON 1023-Economic Development | 17

REFERENCES

Textbooks

Dowling, J.Malcolm, Valenzuela, Ma.R.,Brux, J. (2019) Economic Development Philippine Edition. Cengage
learning Asia Pte Ltd.

WARNING: No part of this E-module/LMS Content can be reproduced, or transported or shared to others without
permission from the University. Unauthorized use of the materials, other than personal learning use, will be penalized.
Please be guided accordingly.

ECON 1023-Economic Development | 18