Chapter 8 · objectives (goals) of development –It’s more fun to be healthy than sick, and it’s pleasurable to read •Health and education are also important causes of growth

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Chapter 8

Human Capital:

Education and

Health in

Economic

Development

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-2

The Central Roles of Education

and Health

• Health and education are important

objectives (goals) of development

– It’s more fun to be healthy than sick, and it’s

pleasurable to read

• Health and education are also important

causes of growth and development

– Healthier and better educated people are more

productive, raising incomes


Education and Health are

Complementary

• Greater health improves the returns to

investments in education

– Healthy children learn more

– Longer payback period on investments

• Greater education improves the returns to

investments in health

– Increases in productivity increase the value of

reductions in mortality and morbidity


Investing in Health and Education:

The Human Capital Approach

• Initial investments in health and 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

• Rates of return to investments in human

capital can be compared to returns on other

investments, e.g. infrastructure


Figure 8.1 Age-earnings Profiles by

Level of Education: Venezuela, 1989


Age Earnings Profiles USA

Earnings by Education and Age

$16,296

$28,224

$35,233 $36,916 $35,338

$27,532$27,210

$48,445

$66,332$70,053

$64,807

$43,378

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

18 to 24

years

25 to 34

years

35 to 44

years

45 to 54

years

55 to 64

years

65 years

and over

Me

an

An

nu

al E

arn

ing

s

HS Grad BA/BS

US Bureau of Census for 2008, Both Sexes, All Races, Earnings > 0


Age Earnings Profiles USA

Earnings by Education and Age

$21,346 $24,943 $27,537 $29,306$18,748

$28,224$35,233 $36,916 $35,338

$27,532

$48,445

$66,332 $70,053$64,807

$43,378

$79,785

$130,730

$147,878$141,584

$112,449

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

25 to 34

years

35 to 44

years

45 to 54

years

55 to 64

years

65 years and

over

Me

an

An

nu

al E

arn

ing

s

9 to 11 HS Grad BA/BS Prof

US Bureau of Census for 2008, Both Sexes, All Races


Figure 8.2 Financial Trade-Offs in

the Decision to Continue in School


Calculation of Rate of Return, r

• BA = earnings with BA/BS

• HS = earnings with HS degree

• C = direct costs of college

• r = rate of return

𝐵𝐴𝑡 − 𝐻𝑆𝑡 − 𝐶𝑡(1 + 𝑟)𝑡−18

65

𝑡=18


Calculate r for BA/BS in US

(Go to EducationEarnings.xls )

18 to

24

years

25 to

34

years

35 to

44

years

45 to

54

years

55 to

64

years

65

years

+

HS Graduate

(Incl Ged) 16,296 28,224 35,233 36,916 35,338 27,532

Bachelor´s

Degree 27,210 48,445 66,332 70,053 64,807 43,378


Social v. Private Rate of Return

• Social counts all costs and returns, including

– Government spending on schools (a cost borne

by society but not by the student, which makes

social return < private return)

– Taxes collected on higher income (a benefit of

higher productivity that is received by society

but not by the student, which makes social

return > private return)

– External benefits of education (if any)


Table 8.1 Rates of Return to

Investment in Education by Level of

Education, Country, Type, and Region


Table 8.2 Male and Female

Education Rates, 2004


The Gender Gap: Women and

Education

• Young females receive less education than young males in nearly every LDC

• Closing the educational gender gap is important because,

– The rate of return on women’s education is higher than that of men in developing countries

– It increases productivity and lowers fertility

– Educated mothers have a multiplier impact on many generations


Distribution of Education

• Lorenz curves for the distribution of

education

Cumulative % of all years of education against

cumulative % of population


Figure 8.6 Lorenz Curves for Education

in India and South Korea, 1990


Figure 8.7 Gini Coefficients for

Education in 85 Countries, 1990


Educational Systems and

Development

• Demand: Private Returns to Education

• Supply: Politics; not focused on Social Returns

– Too much investment in higher education (demanded

by political elites); too little investment in primary

education where returns are higher

– E.g. India: Large expenditure on higher education while

half of population was illiterate. (Now changing)

– Low Quality: 1/3 of teachers absent per day; ½ of

students in Maharashtra are in private schools


Child Labor

• Child labor is a widespread phenomenon

– Reduces education/ Future earnings

• But with work (earnings)

– Nutrition may increase

– Pay other expenses

• A Ban on Child Labor May not be Best,

partly because Ineffective when parent (and

sometimes child) incentives are for work


Child Labor Policies

• World Bank: Child labor is caused by

poverty => Cure poverty

• Expand supply of schools & incentives to

attend

• UNICEF: Regulate child labor to make it

more humane

• ILO: Ban most abusive child labor (slavery,

sale, debt bondage/serfdom, prostitution,

porn, drugs, etc.)


Case Study:

Progresa/Oportunidades in Mexico


Case Study:

Progresa/Oportunidades in Mexico

• Conditional Cash Transfers:

• Government Pays or Provides

– Cash to Parents ($10-35 per month)

– Family Clinic Visits

– Nutritional Supplements

• Conditonal on Children Attending School

• Advantage: Ties together health and school


Results: Progresa/Oportunidades

in Mexico

• Malnutrition declined

• Health indicators rose

• School attendance up/dropout rate down

• Child labor down 15%

• No work reduction among adults

• Cash transfers on bank cards: Admin

efficiency and low corruption


Health in LDCs

• www.gapminder.org

– Vertical = Life Expectancy

– Horizontal = Child Mortality

http://www.gapminder.org/


Health in LDCs

• Great Improvements

– Life Expectancy

– Infant and Child Mortality

• But health indicators remain far below rich

countries

– E.g. Infant Mortality

• India: 70/1,000

• USA: 7/1,000


Figure 8.11 Child Deaths Depend on

Income within Countries, Too


Figure 8.12 Proportion of Children under 5

Who Are Underweight, 1990 and 2005

Major Diseases

• AIDS

• Malaria

• Tuberculosis

• These three are addressed by various

organizations, e.g. UN, Gates Foundation,

President Bush’s AIDs Initiative, et al.


Table 8.2 Regional HIV and AIDS Statistics,

2009

Table 8.3 The Major Neglected Tropical

Diseases, Ranked by Prevalence


Health Problems in LDCs

• Poverty

• Ineffective Government Administration

– Mbeki viewed AIDS as conspiracy of former

colonial powers

– Even when anti-retroviral drugs available, health

systems had difficulty with effective distribution

• Lack of Effective Treatments/Vaccines for

Tropical Diseases


Heart Attack Death Rates

0

20

40

60

80

100

120

140

160

180

200

1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

De

ath

s p

er

10

0,0

00

Po

p'n

Canada

France

Norway

United Kingdom

United States

OECD 2009 "Acute Myocardial Infarction"


Cerebrovascular Death Rates

0

20

40

60

80

100

120

140

160

180

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

De

ath

s p

er

10

0,0

00

Po

p'n

Canada

France

Norway

United Kingdom

United States

OECD 2009


Why so Little Progress on Tropical

Diseases?

• Lack of Market (Profitability)

– Consumers (Governments, Individuals) are Low

Income => Low Willingness to Pay

– Insecure Patent Rights: Drug companies unable

to recover multi-billion dollar investments in

drug development, cuz

– Marginal Cost of production << Average Cost

including drug development costs


Advance Market Commitment

Working Group

• Goal: Vaccine for Malaria

• International sponsors commit to buy 200

million doses at $15

• $14 paid by sponsors; $1 by LDCs

• $3 billion = average market new drug in DCs

• If later vaccine superior, it receives

guarantee as well

Health and Education

• Both Goals and Consequences of

Development

• Human Capital Approach: Investments in

Health and Education increase Productivity

• Often, Markets and Governments Fail to

Provide Efficient and Fair Investments

• Policy Reform can Improve Situation


Documents

Chapter 8 · objectives (goals) of development –It’s more fun to be healthy than sick, and it’s pleasurable to read •Health and education are also important causes of growth