Chapter 8
Human Capital:
Education and
Health in
Economic
Development
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Development & Human Capital
• Health and education are investments in
human capital to improve labor productivity
• Investment in human capital is a major
determinant of growth and development
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Development & Human Capital
• Investment in health increases the return to
investment in education
• Investment in education increases the return
to investment in health
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Development & Human Capital
• Economic growth would not lead to substantial
increases in investment in children’s education
and health
• Better educated mothers tend to have educated
and healthy children
• Market failure in education and health requires
policy action
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Determinants of Education Demand
• Wage or income differential paid to workers
with various levels of education
• Probability of success in finding a job in the
formal sector
• Direct private cost of education (e.g., tuition)
• Indirect or opportunity cost of education (i.e.,
foregone income)
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Return of Investment in Education
• Initial investments in education lead to a
stream of higher future income
• The present discounted value of this stream
of future income is compared to the cost of
education
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The Economics of Education
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Age-earnings Profiles by Level of
Education: Venezuela, 1989
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Child Labor in LDCs
• Some 120 million children work full-time
• Some 150 million children work part-time
• Of these 250 million working children
– 61% or 153 million in Asia
– 32% or 80 million in Africa
– 7% or 17 million in Latin America
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Child Labor in LDCs
• Child labor is a common practice in LDCs
labor markets
• The problem may be modeled using the
“multiple equilibria” approach
• Government intervention is needed to move
to a ‘better’ equilibrium
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Market for Child Labor
Adult Labor Supply Adult & Child Labor
A T Supply
Wage • At WE1 labor supply is AA’
• As children enter the market, wage falls
• At WL adult and child labor supply is TT’
WE1 E1 • At WE2, OA’ of adult and A’T’ children
WH are employed; a ban on child labor
B
WL C • moves E2 to E1
The S-shaped curve is supply of child
WE2 E2 labor between these wages: E1BCE2
A’ T’ Demand for Labor
Employment
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The Education Gender Gap
Females receive less education than males in LDCs. To close the gap
• The rate of return on education is higher for female than male
• Female education increases productivity and lowers fertility
• Educated mothers raise educated children
• Female education helps break the vicious cycle of poverty and
inadequate schooling for women
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Male and Female Education
Rates, 2004
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The Education Gender Gap
Consequences of gender bias in health and
education
• Economic incentives
• Cultural setting
• Increase in family income does not always
lead to better health and education
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Social vs. Private Returns of Education
• Social and private returns of education are
higher in LDCs than MDCs
• Private returns are higher than social returns
• Social and private returns are higher for
primary than secondary and higher
education
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Rate of Return to Investment in
Education
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Optimal Level of Education
• Optimality criterion for education: maximum
difference between returns and costs
• Social: the optimal level of education is “primary”
where costs are subsidized and returns are high
• Private: the optimal level of education is “higher”
where costs are heavily subsidized and returns are
very high
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Social Costs & Returns
Costs/Returns Social Returns
Social Costs
Tertiary
Secondary
Primary
Public decision: Invest in primary education
Years of schooling completed
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Private Costs & Returns
Private Returns
Costs/Returns
Tertiary Private Costs
Secondary
Primary
Private decision: Invest in higher education
Years of schooling completed
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Education and Development
• Distribution of education
– Lorenz curves for the distribution of education
• Education Inequality and Poverty
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Lorenz Curves for Education
in India and South Korea, 1990
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Gini Coefficients for Education in
85 Countries, 1990
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Health-Care and Development
Measurement and distribution
• Life expectancy at birth
• Child mortality
• Malnutrition and hunger
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Life Expectancy in World Regions
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Under-5 Mortality Rates in Various
World Regions
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Proportion of Children under 5 Who Are
Underweight, 1990 and 2005
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Deaths of Children under Age 5
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Children’s Likelihood to Die in LDCs
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Regional HIV and AIDS Statistics,
2006
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Health-care and Development
• Disease burden
• HIV/AIDS infection
• Malaria
• Parasitic Worms and Other “Neglected
Tropical Diseases”
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The Major Neglected Tropical Diseases,
Ranked by Prevalence
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Health Systems and
Development
• Health and Productivity
– Is there a connection?
• Health Systems Policy
– Great variability in the performance of health
systems at each income level
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GNI per Capita and Life
Expectancy at Birth, 2002
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