Chapter 8

Human Capital:
Education and
Health in
Economic
Development
 8.1 The Central Roles of
Education and Health
• Health and education are important
objectives of development, as reflected in
Amartya Sen’s capability approach, and in
the core values of economic development
• Health and education are also important
components of growth and development –
inputs in the aggregate production function

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 Education and Health as Joint
Investments for Development
• These are investments in the same individual
• Greater health capital may improve the returns to
investments in education
– Health is a factor in school attendance
– Healthier students learn more effectively
– A longer life raises the rate of return to education
– Healthier people have lower depreciation of
education capital
• Greater education capital may improve the returns to
investments in health
– Public health programs need knowledge learned in
school
– Basic hygiene and sanitation may be taught in
school
– Education needed in training of health personnel
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 Improving Health and Education:
Increasing Incomes Is Not Sufficient

• Increases in income often do not lead to

substantial increases in investment in
children’s education and health
• But better educated mothers tend to have
healthier children at any income level
• Significant market failures in education and
health require policy action

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 8.2 Investing in Education and
Health: The Human Capital Approach

• 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,
especially at higher educational levels

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 Figure 8.1 Age-Earnings Profiles by
Level of Education: Venezuela

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 Figure 8.2 Financial Trade-Offs in the
Decision to Continue in School

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 Table 8.1 Returns to Investment in Education
by Level, Regional Averages (%)

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 8.3 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
• Sometimes this shift can be self-enforcing,
so active intervention is only needed at first

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 Assumptions of the Child Labor
Multiple Equilibria Model
• Luxury Axiom: A household with sufficiently
high income would not send its children to
work
• Substitution Axiom: Adult and child labor
are substitutes (perfect substitutes in this
model), in which the quantity of output by a
child is a given fraction of that of an adult:
QC = γQA, 0 < γ < 1.

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 Figure 8.3 Child Labor as a Bad
Equilibrium

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 Other approaches to child labor
policy
• The Chapter 8 Case Study: Get more children into school (as in
Millennium Development Goals), e.g. new village schools; and
enrollment incentives for parents such as in Progresa/
Oportunidades
• Consider child labor an expression of poverty, so emphasize
ending poverty generally (a traditional World Bank approach,
now modified)
• If child labor is inevitable in the short run, regulate it to prevent
abuse and provide support services for working children (UNICEF
approach)
• Ban child labor; or if impossible, ban child labor in its most
abusive forms (ILO strategy; “Worst Forms of Child Labor
Convention”)
• Activist approach: trade sanctions. Concerns: could backfire
when children shift to informal sector; and if modern sector
growth slows

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 8.4 The Gender Gap: Discrimination
in Education and Health

• Young females receive less education than young males in

nearly every low and lower-middle income developing
country
• Closing the educational gender gap is important because:
– The social rate of return on women’s education is higher
than that of men in developing countries
– Education for women increases productivity, lowers
fertility
– Educated mothers have a multiplier impact on future
generations
– Education can break the vicious cycle of poverty and
inadequate schooling for women
– Good news: Millennium Development Goals on parity
being approached, progress in every developing region

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 Figure 8.4 Youth Literacy Rate,
2008

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 8.4 The Gender Gap: Discrimination
in Education and Health (cont’d)

• Consequences of gender bias in health and

education
– Economic incentives and their cultural setting
– “Missing Women” mystery in Asia

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 Figure 8.5 Estimated Percent of Women
“Missing”

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 The “Missing Women” Crisis

• Research has concluded that in Asia at least 100

million women or more are “missing”
• If gender ratios were closer to normal levels based
on biology, in comparison to other regions such as
Europe, North America, or Latin America (or for
that matter sub-Saharan Africa), that is the
minimum number of additional women who would
be alive in Asia alone
• Some women are also missing in Africa, but a
much smaller proportion
• Reasons include inferior medical care for girls, and
gender selective abortion or female infanticide

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 8.5 Educational Systems and
Development
• Educational supply and demand: the
relationship between employment
opportunities and educational demands
• Social versus private benefits and costs
• Distribution of education
• Education, inequality, and poverty
• Education, Internal Migration, and the Brain
Drain

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Figure 8.6 Private
versus Social
Benefits and Costs of
Education: An
Illustration

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 8.5 Educational Systems and
Development (cont’d)
• Distribution of Education
– Lorenz curves for the distribution of education
• Education, Inequality, and Poverty

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 Figure 8.7 Lorenz Curves for Education in India
and South Korea

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 Figure 8.8 Children’s Likelihood to Die
in Selected Countries

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 Figure 8.9 Proportion of Children under 5 Who
Are Underweight, by Household Wealth, around
2008

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 Figure 8.10 Proportion of Children under 5
Who Are Underweight, 1990 and 2005

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Figure 8.11
Global HIV Trends,
1990–2011

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 Table 8.2 Regional HIV and AIDS Statistics, a
Decade of Bending the Curve, 2011 versus 2001

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 Table 8.3 Some Major Neglected
Tropical Diseases

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 Figure 8.12 Wages, Education, and Height of
Males in Brazil and the United States

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 Disease Burden

• HIV/AIDS
• Malaria
• Parasitic Worms and Other “Neglected
Tropical Diseases”

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 Mexican Program on Education, Health, and
Nutrition (Progresa), Oportunidades Human
Development Program

Some Basic Questions:

• What is the Progresa/Oportunidades program and
what does it try to accomplish?
• How does it try to do so – what are the key program
features?
• Why make transfers conditional? Benefits?
Drawbacks?
• Specifically, how does Progresa work to improve
nutrition?
• Specifically, how does Progresa work to improve
education?
• What were the features of the original evaluation?

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 8.7 Health, Productivity, and
Policy
• Productivity
– Is there a connection with health?

• Health Systems Policy

– Great variability in the performance of health
systems at each country's average income level

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 Concepts for Review

• Acquired immunodeficiency • Health system

syndrome (AIDS)
• Basic education • Human capital
• Brain drain • Human immunodeficiency
• Conditional cash transfer virus (HIV)
(CCT) programs • Literacy
• Derived demand • Neglected tropical diseases
• Discount rate
• Educational certification • Private benefits of
• Educational gender gap education

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 Concepts for Review (cont’d)

• Private costs of education

• Social benefits of education
• Social costs of education
• World Health Organization
(WHO)

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 Algebraic version of the schooling decision diagram
(Note: you can also do a rate of return calculation as in Endnote 19)

Net present value of Income Stream is given by

Yt - Xt - Ct
NPV =å t
(Compare with Equation 11.10)

t (1+ r)
Where:
t is time (year) from present. (The present is time t = 0.)
Yt is expected income from having gone to school, realized at time t
Xt is expected income from having NOT gone to school, at time t
Ct is the cost of going to school borne at time (if any)
r is the rate of discount used

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