Chapter 8
Human Capital: Education and Health
in Economic Development
Key Concepts
Education and health are discussed as part of the development of human capital. Key topics addressed
in the chapter include:
The central role of education and health in the development process.
The complementary relationship between education and health.
Child labor and the gender gap.
Educational systems and development.
Health systems and development.
Policy options for improving education and health.
Section 8.2 describes the key complementary relationship between education and health. Section 8.3
discusses child labor and section 8.4 discusses the gender gap in health and education and present data
and several approaches to dealing with these two issues.
Section 8.5 focuses on educational systems and development which includes the determinants of the
demand and supply of education places, and the distinction between the private and social benefits and
costs of investment in education.
The demand for education is determined by the expected income benefits and direct and indirect costs
of schooling, while the supply of school places (at all levels) is determined by the political process,
and is often unrelated to economic criteria. In most developing countries expected income gains from
additional years of education are high, in that modern sector employers, including the government,
select by educational attainment irrespective of actual work requirements.
The concepts of social and private costs and returns to education are explained. Two graphs illustrate
how the private and social costs and benefits change as years of schooling increase. The expected private
return increases at an increasing rate while the private cost increases much more slowly, indicating
that from an individual’s viewpoint it is optimal to secure as much schooling as possible. In contrast,
the social returns increase sharply at first and then taper off while the social costs increase at an increasing
rate, indicating that there is an optimal quantity of schooling, at the point where the marginal social
costs and benefits are equal. The text suggests that public resources are being misallocated by providing
too much schooling. It is also suggested that it might be better for the government to invest in higher
quality, rather than higher quantity, education.
Several conclusions are drawn with respect to the relationship between education, society, and development.
Distribution of Education: Not only the quantity of education is important. More important is its
quality and how it is distributed amongst the population.
Education, inequality, and poverty: The education system can increase inequality if the poor lack access
to education and/or the rich are disproportionately represented in secondary and university schooling. A
poor person’s rate of return to investment in education may be lower than a rich person’s. This is
demonstrated with an added section on tutor and computer-assisted learning programs.
Education, internal migration, and the brain drain: The more educated tend to migrate out of the
rural areas, and sometimes out of the country.
Education of women, fertility, and child health: There is an inverse relationship between the
education of women and family size.
Section 8.6 focuses on health systems and development. Section 8.7 provides information on the burden
of various diseases (specifically malaria and HIV/AIDS) in developing countries, as well as how the
prevalence of certain diseases affects labor productivity. A new section on Parasitic Worms and other
neglected tropical diseases has been added. A small case study on Uganda, added in the 11th edition,
remains. The case study highlights how Uganda’s efforts allowed it to become the first to see a significant
reduction in the prevalence of HIV/AIDS. The last section of chapter 8 deals with productivity and health
policy.
As an example of a conditional cash transfer program (CCT) chapter 8 ends with a case study on
Progresa/Oportunidades program in Mexico, which directly benefits over 21 million Mexicans. The case
study illustrates how successful development programs increases human capital and can be an effective
tool in combating poverty.
Lecture Suggestions
Though there is a great deal of material covered in this chapter, it is written in such a way that you can
choose to omit certain sections. For example, it would be quite possible to emphasize education over
health by focusing on sections 8.1 to 8.5. Similarly, with less ease, if you wish to emphasize health over
education you could instead focus on sections 8.6 and 8.7. Instructors will find, however, that there is
sufficient student interest and relatively high rewards from covering both topics in some depth.
The model outlined in section 8.3 on child labor is well worth the time for two reasons. First, much as
understanding why poor families choose to have many children when it would seem rational for them have
fewer children the model illustrates why it is rational for poor families them to send their children to work.
Second, the model ties in to the discussion of multiple equilibria found in chapter 4. Class discussion
based on section 8.3 should be directly connected to Figure 8.2 on page 390. They may have some
difficulty understanding this diagram without help but with help should find it important and revealing.
Similarly, the numbers for Venezuela provided in Figure 8.1 and those given for several regions in Table
8.1 can be tied in directly to the social versus private benefits of education found in section 8.5. The
highly skewed distribution of resources for higher education is, of course, not a problem that is unique to
developing countries. Background on the much more egalitarian distribution of educational opportunities
in South Korea over India can be found in Robert Wade’s Governing the Market. Amartya Sen and Jean
Drèze’s article “Radical Needs and Modest Reforms” on the crucial deficiencies in India’s educational
system as well as their most recent book on India provide good background for this very important
economy. Students might also find it interesting that Sen’s Pratichi trust was funded with the money
awarded to him for his 1998 Nobel and is dedicated to making success in India’s educational system less
unequal than it has been.
you may choose to cover the first few sections, which discuss the complementarity between investment in
education and health, and how increasing human capital is a crucial part of the whole development
process. From there you can choose between the next three topics of child labor and the gender gap,
education systems, and the disease burden
Reference to this chapter, can stress one of the basic issues of development i.e. to distinguish between cause
and effect. The belief that an emphasis on higher education will spur development stems, in part, from an
observed correlation between world education levels and per capita income. However, income and higher
education attainment are mutually reinforcing in the developed countries where the demand for higher
education follows from development, which is itself caused more by expanded basic education. The same
confused cause and effect story line holds for agriculture versus industry development, urbanization, etc.
The subject matter of this chapter, education and health, is one of the most fundamental in development
and one most closely tied to current events. It lends itself very easily to illustration with examples from
nonacademic publications. Of course, the tremendous interest in the media on HIV/AIDS goes without
saying and, in the course of the semester, instructors can find many stories to illustrate policies to combat
this pandemic. Combating malaria has also been widely discussed recently, with the Gates Foundation
taking an active role, to provide just one example. As mentioned above, the political economy of how
educational resources are distributed and the obstacle to reform that the beneficiaries of the stats quo put in
the way of reform is likely to generate a great deal of discussion. . Instructors will find that referring to
such current interest stories is rewarding not only by illustrating the lectures but also by raising student
awareness of different approaches to health and education around the world.
Discussion Topics
Discuss the short run and long run equity issues related to increasing the quality of education as
opposed to the quantity. Students should be able to comment on the short run and long run effects on
population growth, employment, growth, and welfare.
Have students discuss their decision to attend college with respect to private costs and expected
private returns.
Discuss the difficulties associated with allocating scarce public resources. Make up a budget and two
or three projects in addition to education, and have students discuss the costs and benefits of each.
Alternative projects could include rural public works projects, urban infrastructure improvements for
the informal sector, investment subsidies for the modern industrial sector, or credit programs for the
rural or informal sector. Students should have enough knowledge at this point to be fairly specific
about costs and benefits as they relate to welfare, growth in output, growth in labor productivity, and
growth in employment. If your class is small you could also break up into groups and then have each
group make a short, informal presentation. A class assignment that puts students in the position of a
policy maker, provides them with two or three very different proposals, and then asks to explain which
is best is a valuable exercise whether done in class in groups or is included as part of a problem set or
homework assignment.
Sample Questions
Short Answer
1. Write an essay on the economic relationship of greatest concern for development between education and
(a) the level of growth,
(b) the character of growth,
(c) inequality,
(d) fertility,
(e) absolute poverty,
(f) international migration.
Answer: This question may be given as one long essay, or limited to one or more of the parts as a
2. What is human capital and why is it crucial to expand human capital as part of the development process?
Answer: Human capital is defined as human capacities that raise productivity. In particular, human
capital is focused on the level of education and health within the population. As more
3. What factors cause private and social rates of return for primary and secondary education to diverge
in developing countries?
Answer: Subsidies. Credential inflation as a way to select from among qualified applicants in the
high wage modern sector.
4. Why have poor nations invested so much money in education and health? Evaluate the soundness of
these reasons.
Answer: Discussed in the chapter. Education and health improvements will increase labor productivity.
Both are essential for sustained growth.
5. Why is eradicating child labor seen as an economic investment?
Answer: Answers should include reference to the estimated $5 trillion in economic gains and a high
rate of return on the investment needed to eliminate child labor and provide more education
6. Compare the relative effectiveness of the balsakhi program to the Computer-Assisted Learning (CAL)
program in India.
Answer: Discussed in Box 8.6. Both programs are effective in helping primary school students
7. Explain some of the reasons why developing countries have not realized a greater positive
development impact from their higher education programs.
Answer: Lack of program focus on the needs of the country and lack of mechanisms to ensure
8. Why should the development of a solid elementary education system take precedence over an
expansion of the university system in developing countries?
Answer: One reasonable answer would apply the law of diminishing returns. Another would stress
that university trained graduates have limited benefit without complementary inputs of
9. Evaluate critically the following statement: The developed countries have all shown a significant
increase in the numbers of university-trained workers as incomes have risen; thus the development
of a solid university system should be among the major priorities of developing countries.
Answer: Students might be expected to distinguish between cause and effect. A better-educated
10. Explain why the education of girls is probably the most cost-effective development investment. Be
sure to include in your answer some discussion of at least two of the following: absolute poverty,
health and development, fertility, and agriculture.
Answer: Female education leads not just to better employment opportunities but also to a better
11.In developing countries higher educational facilities have tended to expand to the point where social
benefits exceed private benefits. What is the economic explanation for this?
Answer: Supply and demand are not equated by a price adjusting market mechanism, but rather
12. Is child labor a problem in developing countries? Explain.
Answer: Discussed in the chapter. Students might comment on the magnitude of the problem as well
13. Explain how a better-educated population will also tend to be healthier, and vice versa, that a
healthier population will tend to be better educated.
Answer: Education and health care complementary.
14. How can an increase in human capital lead to an increase in GDP? Why might it not lead to an
increase in GDP?
Answer: will vary. Labor is more productive as human capital increases. Population growth can be
expected to eventually fall as human capital increases. It might not lead to an increase in
15. Investment in human capital is very similar to investing in physical capital. True or false? Explain
your answer.
Answer: They are similar in the sense that rates of return can be calculated for each form of capital
so one can compare these and make a choice as to which type of investment to undertake.
16. What is educational inequality and how is it measured? Why is it important to measure the degree of
educational inequality in a country? Explain your answer.
Answer: Measures how the quantity of education is distributed amongst the population ages 15 and
17. What are the critical health challenges facing developing countries today and what measure(s) are
being taken to confront these challenges? Explain your answer.
Answer: Combating the burden of diseases (malaria and HIV/AIDS prominent among these) and
18. Why do you think Uganda has been so successful at decreasing the prevalence of HIV/AIDS?
Answer: An answer should make reference Box 8.8, especially noting the role of education,
19. Although Progresa/Oportunidades has been successful in Mexico, why might a similar program not
work elsewhere?
Answer: This problem is designed to get students to think about how development solutions in one
country cannot necessarily be duplicated and be successful in another country. Answers
Multiple Choice
1. Developing countries have not benefited as much as expected from their higher education programs
because of
(a) lack of program focus on the needs of the country.
(b) increasing returns to scale in each individual’s education.
(c) graduates get jobs in the private sector.
(d) all of the above.
2. Education of girls is a crucial development investment because
(a) it leads to improved child health.
(b) it leads to reduced fertility.
(c) women do most of the work in agriculture.
(d) all of the above.
3. It is important to place particular stress on the role of primary education in the development strategy
because of
(a) LDC’s comparative advantage from basic skills education.
(b) the law of diminishing returns.
(c) development emphasis on poverty alleviation.
(d) all of the above.
4. Credential inflation results from
(a) a combination of cost-push inflation and demand-pull inflation.
(b) rigidities in the industrial sector.
(c) the need to select from among qualified applicants in the modern sector.
(d) all of the above.
5. The fact that developed countries have strong, widely attended university systems indicates that
(a) university expansion should be a development priority.
(b) universities teach skills used on the job.
(c) developing countries place too much stress on agriculture.
(d) none of the above.
6. An individual’s demand for education is most affected by
(a) direct and indirect costs of schooling.
(b) development priorities of the country.
(c) the desire to escape agricultural work.
(d) all of the above.
7. Concentration of resources on higher rather than basic education in developing countries tends to lead to
(a) greater inequality.
(b) lower fertility.
(c) less international migration.
(d) more job creation.
8. The supply of public school places is determined by
(a) individuals’ demand for education.
(b) direct and indirect costs of schooling.
(c) political processes, often unrelated to economic criteria.
(d) all of the above.
9. Studies show that improved education of women in developing countries leads to
(a) lower infant mortality.
(b) better designed, market based development policies.
(c) lower international dependence.
(d) all of the above.
10. Human capital is best defined as
(a) the amount of wealth people have.
(b) the amount of money people have to spend on schooling.
(c) human capacities that raise productivity.
(d) the average education level of the population.
11.Child labor is a widespread problem that applies primarily to children
(a) between the ages of 5 and 14.
(b) between the ages of 10 and 14.
(c) between the ages of 12 and 14.
(d) between the ages of 12 and 16.
12. The World Bank approach to combating child labor stresses
(a) making child labor legal under certain conditions.
(b) tackling the sources of poverty.
(c) encouraging families to migrate to richer countries.
(d) providing each child with a computer so that children have an alternative to working.
13. The ILO approach to combating child labor stresses
(a) encouraging parents to migrate to the cities in search of work.
(b) banning child labor.
(c) tackling the sources of poverty.
(d) all of the above.
14. As the number of years of schooling completed increases, the expected private return and private cost
of education
(a) increase at roughly the same rate.
(b) increase at different rates with expected private return increasing at a slower rate than private cost.
(c) increase at different rates with expected private return increasing at a faster rate than private cost.
(d) do not increase.
15. According to the 2005 UNDP Human Development Report child mortality (under age 5) has declined
in all regions of the world except:
(a) South Asia
(b) Sub-Saharan Africa
(c) Middle East and North Africa
(d) None of the above
16. According to the Regional HIV and AIDS Statistics data from WHO, which region of the world has
the largest number of adults and children living with HIV?
(a) South and South-East Asia
(b) Sub-Saharan Africa
(c) Latin America
(d) North America