Economic

Development

Jennifer V. Lu

Jennica C. Maquilang

Jaycel Babe A. Verances

8.1 The Central Roles of Education and Health

Health and education are important objectives of development. Health is central to well-being,
and education is essential for a satisfying and rewarding life. Education plays a key role in the
ability of a developing country to absorb modern technology and to develop the capacity for self-
sustaining growth and development. Moreover, health is a prerequisite for increases in
productivity, and successful education relies on adequate health as well.

Health and education are also important components of growth and development – inputs in the
aggregate production function. Their dual role as inputs and outputs gives health and education
their central importance in economic development.

There has been a very dramatic improvements in world health and education over past half
century. First is the child mortality. During 1950, child mortality was 280 per 1000 births in
developing world. In 2002, it was 120/1000 in low-income countries and 37/1000 in middle -
income countries. Second, major childhood illnesses are largely controlled. These include rubella
and polio through the use of vaccines. And lastly, the significant improvement in literacy rates
and basic education to majority of people in developing countries.

Despite these achievements, the developing world still faces challenges in improving health and
education of its people. The distribution of health and education within countries is as important
as income distribution.

So in this chapter, we will examine the roles of education and health in economic development
and how these two human capital issues are treated together because of their close relationship.

8.1 Education and Health as Joint Investments for Development

Education and health are investments in the same individual.

Greater health capital may improve the returns to investments in education because health is an
important factor in school attendance. Also, healthier students tend to learn more effectively. A
longer life raises the rate of return to education. Thus, healthier people have lower depreciation
of education capital.

On the other hand, greater education capital may improve the returns to investments in health.
These include public health programs need knowledge learned in school since many health
programs rely on basic skills often learned at school, including personal hygiene and sanitation,
not to mention basic literacy and numeracy which are taught in school. Education is needed for
the training of health personnel. Education also leads to delayed childbearing, which improves
health.
8.1 Improving Health and Education: Why Increasing Incomes Is Not Sufficient

Health and education much higher in high-income countries. Causality might runs in both
directions:
– With higher income, people and governments can afford to spend more on education and
health
– With greater health and education, higher productivity and income are possible.

Because of these relationship, development policy needs to focus on income, health, and
education simultaneously which is parallel on the conclusion in chapter 5. Evidence shows
clearly that increases in income often do not lead to substantial increases in investment in
children’s education and health. There is a low estimated income elasticity of demand for
calories for low income households. Policies to increase income of poor w/o focus on how they
are spent may not lead to improved health, and successful development more generally. This is
due to two factors: (1) Income is spent on other goods besides food. (2) Part of the increased
food expenditures is used to increase food variety without necessarily increasing the
consumption of calories. There is a considerable evidence that the better educated mothers tend
to have healthier children at any income level. There are still opportunities for improving health
through simple activities in school that have not been utilized.

Better health status and nutrition affects school performance. It leads to earlier and longer school
enrollment, better school attendance, and more effective learning. To improve effectiveness of
schooling and enrollments, health of children should be improve in developing countries.

Significant market failures in education and health require policy action such as:
– Spillover benefits to investment in one’s health or education
– Cannot count on market to deliver socially efficient levels of health and education

WHO (2000) concluded in its 2000 World Health Report that ultimate responsibility for the
performance of a country’s health system lies with government.
8.2 Investing in Education and Health: The Human Capital Approach
 The analysis of investments in health and education is unified in the human capital approach.
Human capital is the term economists often use for education, health, and other human
capacities that can raise productivity when increased. The impact of human capital investments
in developing countries can be quite substantial.

 The illustration shows the age-earnings profiles by levels of education in Venezuela. The chart
shows how incomes vary over the life cycle for people with various levels of education.

 Figure 8.1 shows the age-earnings profiles by

levels of education in Venezuela. The chart shows
how incomes vary over the life cycle for people
with various levels of education.

 Figure 8.2 provides a typical schematic

representation of the trade-offs involved in the
decision to continue in school. This is taken to be
66 years. Two earnings profiles are presented—for
workers with primary school but no secondary
education and for those with a full secondary (but
no higher) education. Primary graduates are
assumed to begin work at age 13, and
secondary graduates, at age 17. For an
individual in a developing country
deciding whether to go on from primary to
secondary education, four years of income
are forgone. This is the indirect cost, as
labeled in the diagram. There is also a
direct cost, such as fees, school uniforms,
books, and other expenditures that would
not have been made if the individual had
left school at the end of the primary grades.
Over the rest of the person’s life, he or she
makes more money each year than would
have been earned with only a primary
education. This differential is labeled “Benefits” in the diagram. Before comparing costs with
benefits, note that a dollar today is worth more to an individual than a dollar in the future, so
those future income gains must be discounted accordingly. The rate of return will be higher
whenever the discount rate is lower, the direct or indirect costs are lower, or the benefits are
higher.
8.3 Child Labor

Child labor is a widespread phenomenon. The problem may be modeled using the
“multiple equilibria” approach. Sometimes this shift can be self-enforcing, so active intervention
is only needed at first. 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, in which the quantity of output by a
child is a given fraction of that of an adult: QC =γQA, 0<γ<1.
Child Labor as a Bad Equilibrium

To summarize, as long as the wage is above wH, the supply curve is along AA′; if the wage is
below wL, the supply curve is along TT′, and in between, it follows the S-shaped curve between
the two vertical lines.

Other approaches to child labor policy:

• Get more children into school (as in Millennium Development Goals), e.g. new village schools;
and enrollment incentives for parents such as in PROGRESA
• Consider child labor an expression of poverty, so emphasize ending poverty generally (a
traditional World Bank approach)
• 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 export sector growth slows
8.4 The Gender Gap: Discrimination in Education and Health

Education and Gender

 Young females receive less education than young males in most low-income developing
countries. While youth literacy is now much higher than it was as recently as 1990. Large
majorities of illiterate people and those who have been unable to attend school around the
developing world are female. The educational gender gap is especially great in the least
developed countries where female literacy rates can be less than half that of men. School
completion is also subject to gender inequalities, and the gap is often particularly large in
rural areas. Empirical evidence shows that educational discrimination against women hinders
economic development in addition to reinforcing social inequality.

Closing the educational gender gap by expanding educational opportunities for women, a key
plank of the Millennium Development Goals, is economically desirable for at least three reasons:

1. The rate of return on women’s education is higher than that on men’s in most developing
countries. [This may partly reflect that, with fewer girls enrolled, the next (marginal) girl
to enroll is likely to be more talented on average than the marginal boy.]
2. Increasing women’s education not only increases their productivity (and hence also
earnings) in the workplace but also results in greater labor force participation, later
marriage, lower fertility, and greatly improved child health and nutrition, thus benefiting
the next generation as well. The latter is because a mother’s education directly increases
knowledge that can help child survival, nutrition, education, and indirectly by making
possible higher earnings for the family—noting in particular that mothers generally spend
a somewhat larger fraction of an additional dollar on their children than do fathers.
3. Because women carry a disproportionate burden of poverty, any significant
improvements in their role and status via education can have an important impact on
breaking the vicious circles of poverty and inadequate schooling.

Health and Gender

 Girls also face discrimination in health care in many developing countries.
Example: In South Asia studies show that families are far more likely to take an ill boy than
an ill girl to a health center. Women are often denied reproductive rights, whether legally or
illegally. Broadly, health spending on men is often substantially higher than that on women.
And in many countries such as Nigeria, health care decisions affecting wives are often made
by their husbands.
 Female genital mutilation/cutting (FGM/C) is a health and gender tragedy, explained in an
influential 2005 UNICEF report, Changing a Harmful Social Convention: Female Genital
Mutilation/Cutting.
- Most widely practiced in sub-Saharan Africa and the Middle East and is believed to have
affected about 130 million women.
 - This practice, which is dangerous and a violation of the most basic rights, does not only
result from decisions made by men; many mothers who have undergone FGM/C also
require their daughters to do so.
- If most other families practice FGM/C, it becomes difficult for any one family to refuse
to take part, to avoid the perceived resulting “dishonor” to the daughter and her family
and lost “marriageability.”
- In an encouraging sign of progress, there are a growing number of experiences of “mass
abandonment” of the practice of FGM/C, sometimes started with an organized pledge of
families in an intermarrying group that they will no longer follow the practice with their
daughters. Thus, such coordination failures can be overcome, often with facilitation of
locally based NGOs and similar organizations.

Consequences of Gender Bias in Health and Education

 Studies from around the developing world consistently show that expansion of basic
education of girls earns among the very highest rates of return of any investment—
- Much higher, for example, than most public infrastructure projects. One estimate is that
the global cost of failing to educate girls is about $92 billion a year. This is one reason
why discrimination against girls in education is not just inequitable but also very costly
from the standpoint of achieving development goals.
 Education of girls has also been shown to be one of the most cost-effective means of
improving local health standards.
- Studies by the United Nations, the World Bank, and other agencies have concluded that
the social benefits alone of increased education of girls is more than sufficient to cover its
costs— even before considering the added earning power this education would bring.
However, evidence from Pakistan, Bangladesh, and other countries shows that we cannot
assume that education of girls will increase automatically with increases in family
income.
 Inferior education and health care access for girls shows the interlinked nature of economic
incentives and the cultural setting.
- In many parts of Asia, a boy provides future economic benefits, such as support of
parents in their old age and possible receipt of a dowry upon marriage, and often
continues to work on the farm into adulthood. A girl, in contrast, may require a dowry
upon marriage, often at a young age, and will then move to the village of her husband’s
family, becoming responsible for the welfare of her husband’s parents rather than her
own. A girl from a poor rural family in South Asia will in many cases perceive no
suitable alternatives in life than serving a husband and his family; indeed, a more
educated girl may be considered “less marriageable.” For the parents, treatment of
disease may be expensive and may require several days lost from work to go into town
for medical attention. Empirical studies demonstrate what we might guess from these
perverse incentives: Often more strenuous efforts are made to save the life of a son than a
daughter, and girls generally receive less schooling than boys.
 The bias toward boys helps explain the “missing women” mystery.
- In Asia, the United Nations has found that there are far fewer females as a share of the
population than would be predicted by demographic norms. Estimating from developed-
country gender ratios, Nobel laureate Amartya Sen concludes that worldwide “many
more than” 100 million women are “missing.” Evidence shows that these conditions are
 continuing to worsen in China and India, implying that tens of millions of young males
will be unable to marry, increasing the chances of future social instability. Sex-selective
abortion is an important cause and poverty of women.
 Greater mothers’ education, however, generally improves prospects for both their sons’ and
daughters’ health and education, but apparently even more so for girls.
- Taken together, the evidence shows that increases in family income do not automatically
result in improved health status or educational attainment. If higher income cannot be
expected to necessarily lead to higher health and education, as we will show in
subsequent sections, there are no guarantees that higher health or education will lead to
higher productivities and incomes. Much depends on the context, on whether gains from
income growth and also the benefits of public investments in health and education and
other infrastructure are shared equitably.

8.5 Educational Systems and Development

It revolves around two fundamental economic processes:

The Political Economy of Educational Supply and Demand: The Relationship between
Employment Opportunities and Educational Demands

The amount of schooling received by an individual, although affected by many nonmarket

factors, can be regarded as largely determined by demand and supply, like any other commodity
or service.

On the demand side, the two principal influences on the amount of schooling desired are
(1) a more educated student’s prospects of earning considerably more income through future
modern-sector employment (the family’s private benefits of education).
(2) the educational costs, both direct and indirect, that a student or family must bear. The amount
of education demanded is thus in reality a derived demand for high-wage employment
opportunities in the modern sector. This is because access to such jobs is largely determined
by an individual’s education.

On the supply side, the quantity of school places at the primary, secondary, and university levels
is determined largely by political processes, often unrelated to economic criteria. Given
mounting political pressure throughout the developing world for greater numbers of school
places at higher levels, we can for convenience assume that the public supply of these places is
fixed by the level of government educational expenditures. These are in turn influenced by the
level of aggregate private demand for education.

The amount of schooling demanded that is sufficient to qualify an individual for modern-sector
jobs appears to be related to or determined by the combined influence of four variables: (a) the
wage or income differential, (b) the probability of success in finding modern-sector employment,
the direct private costs of education, and the indirect or opportunity costs of education.
As employment opportunities diminish (for given level of education) demand for higher
education increases putting pressure on government to expand educational facilities at the higher
level..

B. Social versus Private Benefits and Costs

– Widening gap between social and private costs at higher levels of education
• Stimulates even greater demand for higher education.
– More resources misallocated to educational expansion (in terms of social costs) means
diminished potential for creating new jobs.
– Provide education up to where marginal social costs equal marginal social returns
• Basic education? Secondary education?
– Devote resources for expanding education system to rural public works or on increasing quality
of basic education in rural areas.

C. Distribution of Education

Unequal distribution of education in developing countries. Just as we can derive Lorenz curves
for distribution of income (see Chapter 5), we can also develop Lorenz curves for the distribution
of education.

. The closer the Lorenz curve is to the 45-degree line, the more equal the distribution of
education.
As can be seen from the figure, South Korea had a much more equal distribution of education

than India.

– When quality (teaching, facilities, curricula, etc.) is considered, inequality much greater
– Quantity and quality differentials explains differential earnings and productivity (Behrman and
Birdsall, 1983).
8.6 Health Measurement and Disease Burden

The World Health Organization (WHO), the key UN agency concerned with global health
matters, defines health as “a state of complete physical, mental, and social well-being and not
merely the absence of disease and infirmity.” An alternative measure of health promoted by the
WHO is the disability-adjusted life year (DALY).

Using DALY, World Bank

calculated one-quarter of the global
burden of disease was represented by
diarrhea, childhood diseases
including measles, respiratory
infections, parasitic worm infections,
and malaria.

Figure 8.8 shows that the children of

the poor are much more likely to die
than those of the rich.

Figure 8.9 points to an important culprit. The

proportion of children under age 5 who are
underweight is far higher for poorer quintiles
than for richer quintiles, particularly in South
Asia and sub-Saharan Africa.

In 2012, nearly 7 million children under the age of 5 died in developing countries. This means
that under-5 child deaths accounted for about 12% of all deaths worldwide. Because most of
these children died of causes that could be prevented at very low cost per child, it has been
rightly claimed that their real underlying disease is poverty.

Although child hunger has been

declining in all developing regions, the rate
of improvement is too slow to achieve even
the fundamental Millennium Development
Goal target of halving hunger between 1990
and 2015 (see Figure 8.10).

Three crippling disease burden in Developing countries:

1. HIV/AIDS
2. Malaria
3. Parasite

HIV/AIDS

Human immunodeficiency virus (HIV) - The virus that causes the acquired immunodeficiency
syndrome (AIDS).

Acquired immunodeficiency syndrome (AIDS) Viral disease transmitted predominantly

through sexual contact.

The AIDS epidemic has been threatening to halt or even reverse years of hard-won
human and economic development progress in numerous countries. Close to 70 million people
have been infected with the HIV virus; and about half of them—about 35 million people—have
already died of AIDS.
In Figure 8.11a, we see that there has been a global fall in numbers of people newly infected with
HIV, beginning around the late 1990s.

In Figure 8.11b, we see that globally, the number of people living with HIV began leveling off
around the turn of the century. In part, this corresponded to some infected people dying.

Now in the last few years, globally the number of adult and child deaths due to AIDS has been
actually falling, as seen in Figure 8.11c.
In sub-Saharan Africa, known as the epicenter of the disease with the highest overall HIV
prevalence, the number of people becoming newly infected with HIV fell from 2.4 million to 1.8
million.
MALARIA

Malaria directly causes over 1 million deaths each year, most of them among impoverished
African children. Severe cases of malaria leave about 15% of the children who survive the
disease with substantial neurological problems and learning disabilities.

The WHO’s Roll Back Malaria Partnership seeks to eradicate this disease at its source.
Eradication has been most successful where campaigns have combined better targeted DDT
spraying and draining swamps where malarial mosquitoes are breeding with using mosquito bed
nets, improving nutrition to build resistance, and sealing houses against mosquito entry.

Parasitic Worms and Other “Neglected Tropical Diseases”

The incidence of debilitating parasitic worms has been vast with some 2 billion people
affected—300 million severely. According to WHO estimates, the disease infects about 200
million people in 74 developing countries, of whom about 120 million are symptomatic and
some 20 million suffer severe consequences, including about 200,000 deaths each year.
Table 8.3 shows the 13 major neglected tropical diseases, ranked by their global prevalence
(number infected).

Neglected tropical diseases

- Thirteen treatable diseases, most of them parasitic, that are prevalent in developing
countries but receive much less attention than tuberculosis, malaria, and AIDS.

8.7 Health, Productivity and Policy

Productivity

Poor health conditions in developing countries affects the productivity of the adults. Studies
show that healthier people earn higher wages. Careful statistical methods have shown that a large
part of the effect of health on raising earnings is due to productivity differences: It is not just the
reverse causality that higher wages are used in part to purchase better health.
John Strauss and Duncan Thomas found that taller men earn more money in Brazil, even after
controlling for other important determinants of income such as education and experience (Figure
8.12, panels A1 and A2).

In particular, taller people receive significantly more education than shorter people (see Figure
8.12, panels B1 and B2).

Health Systems Policy

Health Systems - All the activities whose primary purpose is to promote, restore, or maintain
health.

Health systems include the components of public health departments, hospitals and clinics, and
offices of doctors and paramedics. Outside this formal system is an informal network used by
many poorer citizens, which includes traditional healers.
Five performance indicators to measure health systems in the 191 WHO member states:

1. the overall level of health of the population

2. health inequalities within the population
3. health system responsiveness (a combination of patient satisfaction and system
performance)
4. the distribution of responsiveness within the population (how well people of varying
economic status find that they are served by the health system) and
5. the distribution, or fairness, of the health system’s financial burden within the population

An effective government role in health systems is crucial for at least four important reasons.
First, health is central to poverty alleviation, because people are often uninformed about
health, a situation compounded by poverty. Second, households spend too little on health
because they may neglect externalities (such as, literally, contagion problems). Third, the market
would invest too little in health infrastructure and research and development and technology
transfer to developing countries due to market failures. Fourth, public health programs in
developing countries have many proven successes.

Broad Findings

We conclude that health and education play pivotal roles in economic development, as both
inputs into production enabling higher incomes and outputs directly affecting human well-being.
Many health and education problems plague developing countries, ranging from child labor to
heavy disease burdens. Moreover, the wrong kinds of government policies have sometimes led to
distortions in the educational system that have reinforced inequality; and inequities in health
systems are common. Thus, government plays an essential role in health and education, and in
most developing countries, considerable improvements in policy are needed.
Case Study

Pathways out of Poverty:

Progresa/ Oportunidades in Mexico

The Mexican Program on Education, Health, and Nutrition is widely known by its Spanish
acronym, Progresa, though officially renamed the Oportunidades Human Development Program.

Progresa/Oportunidades
- combats child labor, poor education, and health by ensuring that parents can feed their
children, take them to health clinics, and keep them in school while providing financial
incentives to do so.
- builds on the growing understanding that health, nutrition, and education are
complements in the struggle to end poverty.
- features the promotion of an integrated package to promote the education, health, and
nutritional status of poor families. It provides cash transfers to poor families, family
clinic visits, in-kind nutritional supplements, and other health benefits for pregnant and
lactating women and their children under the age of 5.
- low-income parents are paid to send their children to school and clinics: effective in
sustainably reducing poverty.
- an innovative developing-country- designed integrated poverty program. Its major
architect was Santiago Levy, a development economist who led the design and
implementation of the program in the 1990s while serving as deputy minister of finance.
- affects child nutrition through four program components, called pathways:
1. Cash transfers - which may be used in part for improved nutrition;
2. Nutritional supplements given to all participating children under the age of 2,
pregnant and breastfeeding mothers, and children between the ages of 2 and 5
who show signs of malnutrition;
3. Growth monitoring - which provides feedback to parents; and
4. Other preventive measures - including required participation in regular meetings
where vital information about hygiene and nutrition is taught.
 Participating families receive school program payments every other month.

Evaluations of Progresa/Oportunidades indicate that its integrated approach has been highly
successful, with large improvements in the wellbeing of participants. Malnutrition has
measurably declined; family use of health care, including prenatal care, has increased, and
child health indicators have improved; school attendance is up significantly, and the dropout
rate has declined substantially, especially in the so-called transition grades six through nine,
when children either get launched toward high school or drop out.

In conclusion, CCT programs focusing on improving health, nutrition, and education are a
key component of a successful policy to end poverty— although in most cases, they will
need to be part of a broader strategy to be fully effective.