Chap 8
Chap 8
Whereas citizens in Europe, North America, or Japan have more than 12 years
of schooling on average, the average citizen in subSaharan Africa and South
Asia spends less than 昀椀ve years in school—before taking account of teacher
absenteeism and making no adjustment for the lack of schoolbooks and other
resources even when a teacher is present. The “voices of the poor” in Box 8.1
convey some of the impact of deprivation in health and education on people’s
lives. In this chapter, we examine the roles of education and health in
economic development. These two human capital issues are treated together
because of their close relationship. There are dual impacts of the e昀昀ects of
health spending on the e昀昀ectiveness of the educational system and vice
versa; and when we speak of investing in a person’s health and investing in a
person’s education, we are after all talking about the same person. We then
consider the relationships between income on the one hand and health and
education on the other. Despite their close relationship, you will see that
higher household income is no guarantee of improved health and education:
Human capital must be given direct attention in its own right, even in
economies that are growing rapidly. Health and education may be distributed
very unequally, just as income and wealth are. But improved health and
education help families escape some of the vicious circles of poverty in which
they are trapped. Finally, we take a close look at educational and health
systems in developing countries, to identify the sources of the severe
inequalities and ine昀케ciencies that continue to plague them. The evidence
reveals that investments in human capital have to be undertaken with both
equity and e昀케ciency for them to have their potential positive e昀昀ects on
incomes.
Human capital Productive investments embodied in human persons, including
skills, abilities, ideals, health, and locations, often resulting from expenditures
on education, on-the-job training programs, and medical care.
Education and Health as Joint Investments for Development
Health and education are closely related in economic development.3 On one
hand, greater health capital may improve the return to investments in
education, in part because health is an important factor in school attendance
and in the formal learning process of a child. A longer life raises the return to
investments in education; better health at any point during working life may
in e昀昀ect lower the rate of depreciation of education capital. On the other
hand, greater education capital may improve the return to investments in
health, because many health programs rely on basic skills often learned at
school, including personal hygiene and sanitation, not to mention basic
literacy and numeracy; education is also needed for the formation and
training of health personnel. Finally, an improvement in productive e昀케ciency
from investments in education raises the return on a lifesaving investment in
health. Box 8.2 summarizes the linkages between investments in health and
education. The past half-century or so has witnessed unprecedented advances
in human capital. Health and education levels improved in both developed
and developing countries, but by most measures, they have improved more
rapidly in developing countries. As a result, there has been some international
convergence in these measures. Only in sub-Saharan Africa, where life
expectancies fell due to the AIDS crisis, has some doubt been cast on the
trend toward catching up in health. As primary enrollments rise in developing
countries, education is catching up, though some observers believe that the
quality gap may be larger than ever. Even though the health and education
gap between developed and developing countries remains large and further
improvements may prove di昀케cult, the progress to date has been
unmistakable.
income people range from near zero to about 0.5, depending on the region
and the statistical strategy used by the researchers.6 This less than
proportional response is due to two factors: Income is spent on other goods
besides food, and part of the increased food expenditures is used to increase
food variety without necessarily increasing the consumption of calories. If the
relationship between income and nutrition is indeed quite low, as some
studies suggest, then development policies that emphasize increasing
incomes of the poor without attention to the way these additional resources
are expended within the family may not lead to improved health, and
successful development more generally, at least not very quickly. As
discussed further in Chapter 15 and its case study, credit for microenterprises
has been one of the most popular poverty alleviation strategies in recent
years. In this case, credit may help the poor improve their nutrition, for
example, because seasonal price 昀氀uctuations are also shown to be an
important determinant of calorie consumption along with average income
among the very poor, but credit will not be su昀케cient if nutrition remains
inadequate and does not improve automatically with higher income.
Moreover, calories are not the same as nutrition, and the nutrition of earners
is not the same as the nutrition of their children. The income elasticity of
“convenience” foods is greater than unity. An increase in income frequently
allows families in developing countries to switch consumption from nutritious
foods such as beans and rice to nonnutritious “empty calories” such as candy
and soda, which may be perceived as modern and symbolic of economic
success. A major problem is that poor health (e.g., diarrheal diseases) can
negate the health advantages of better nutrition.
There is considerable evidence that the better the education of the mother,
the better the health of her children (see Figure 2.5 on page 61 and Box 8.3).
There are still opportunities for improving health through simple activities in
school that have not been utilized.
Health status, once attained, also a昀昀ects school performance, as has been
shown in studies of many developing countries. Better health and nutrition
lead to earlier and longer school enrollment, better school attendance, and
more e昀昀ective learning.12 Thus, to improve enrollments and the e昀昀ectiveness
of schooling, we must improve the health of children in developing countries.
Indeed, advances in statistical methods are showing that the links from health
to educational attainment in developing countries are stronger than had been
believed (see Box 8.4). These e昀昀ects are large for both boys and often
especially for girls.13 Finally, there are other important spillover bene昀椀ts to
investment in one’s health or education. An educated person provides
bene昀椀ts to people around him or her, such as reading for them or coming up
with innovations that bene昀椀t the community.14 As a result, there are
signi昀椀cant market failures in education. Moreover, a healthy person is not only
less contagious but also can
bene昀椀t the community in many ways that a sick person cannot. Because of
such spillover e昀昀ects, the market cannot be counted on to deliver the socially
e昀케cient levels of health and education. Thus, as the World Health
Organization (WHO) concluded, “Ultimate responsibility for the performance of
a country’s health system lies with government.”15 Developing-country
o昀케cials are drawing lessons from the many studies showing the
interrelationships among health, education, and incomes and are devising
integrated strategies. The case study of Mexico at the end of this chapter
provides an important example.
8.2 Investing in Education and Health: The Human Capital Approach
The analysis of investments in health and education is uni昀椀ed 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. An analogy is made to conventional investments in physical
capital: After an initial investment is made, a stream of higher future income
can be generated from both expansion of education and improvements in
health. As a result, a rate of return can be deduced and compared with returns
to other investments. This is done by estimating the present discounted value
of the increased income stream made possible by these investments and then
comparing it with their direct and indirect costs. Of course, health and
the extra income gained in the future as a result of higher health status.
Figure 8.2 provides a typical schematic representation of the trade-o昀昀s
involved in the decision to continue in school.18 It is assumed that the
individual works from the time he or she 昀椀nishes school until he or she is
unable to work, retires, or dies. This is taken to be 66 years. Two earnings
pro昀椀les 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. The child may
work part time, a possibility ignored here for simplicity, but if so, only part of
the indirect-cost area applies. 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 di昀昀erential is labeled
“Bene昀椀ts” in the diagram. Before comparing costs with bene昀椀ts, 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, as is done in Equation
8.1. The rate of return will be higher whenever the discount rate is lower, the
direct or indirect costs are lower, or the bene昀椀ts are higher.
This analysis was performed from the individual’s point of view in the three
right-hand columns of Table 8.1. Notice that in sub-Saharan Africa, the
that the higher rates of return for developing countries re昀氀ect that the income
di昀昀erential between those with more and less schooling is greater on average
than for the developed countries.
The 昀椀rst three columns of Table 8.1 indicate the social rate of return. This is
found by including the amount of public subsidy for the individual’s education
as part of the direct costs, because this is part of the investment from the
social point of view (and also by considering pretax rather than after-tax
incomes). Details of the calculations are presented in note 19.19 It should be
noted that these social returns are probably understated because they do not
take into account the externality that educated people confer on others (e.g.,
being able to read for other family members and coworkers), not to mention
other individual and social bene昀椀ts such as increased autonomy and civic
participation, being able to communicate more e昀昀ectively, making more
informed choices, and even being taken more seriously in public discussions,
as stressed by Amartya Sen. Figure 8.2 can also be used to illustrate the
bene昀椀t-cost trade-o昀昀 from the public policy point of view by including 昀椀scal
costs and social welfare bene昀椀ts; that is, adding the social costs of education
such as subsidies to the direct costs part of the costs area below the x-axis
and adding in any net spillover bene昀椀ts to the bene昀椀ts area (not shown are
such bene昀椀ts as occur before graduation or after retirement).
“are either under the minimum age for work or above that age [through age
17] and engaged in work that poses a threat to their health, safety, or morals,
or are subject to conditions of forced labor.” This number is down about 3%
from the 222 million estimated for 2004. There are over 9 million child
laborers between the ages of 5 and 11, nearly a third of them doing
hazardous work. More than half of child laborers, some 115 million children,
are still exposed to hazardous work. More than half of all child laborers live in
Asia and the Paci昀椀c, but subSaharan Africa has the highest rate of child labor.
Among children doing hazardous work, over 48 million live in Asia and the
Paci昀椀c, nearly 39 million live in sub-Saharan Africa, and over 9 million live in
Latin America. Child labor remains a problem in the Arab states, where the
issue has been largely ignored until very recently. And major progress has
been made in some countries such as Brazil and some regions such as Kerala
in India.
Working conditions are often horrendous; the ILO reports that some of its
surveys show that more than half of child laborers toil for nine or more hours
per day. The worst forms of child labor endanger health or well-being,
involving hazards, sexual exploitation, tra昀케cking, and debt bondage. In a
2011 publication, the ILO reported that every year, about 22,000 children die
as a result of work-related accidents. Clearly, child labor is not an isolated
problem but a widespread one, especially in Africa and South Asia.
Nevertheless, it is not obvious that an immediate ban on all forms of child
labor is always in the best interests of the child. Without work, a child may
become severely malnourished; with work, school fees as well as basic
nutrition and health care may be available. But there is one set of
circumstances under which both the child laborer and the family as a whole
may be unambiguously better o昀昀 with a ban on child labor: multiple equilibria.
Kaushik Basu has provided such an analysis, and we shall 昀椀rst consider his
simple model, which shows how this problem may arise.
To model child labor, we make two important assumptions: First, a house -
hold with a su昀케ciently high income would not send its children to work. As
one might hope, there is strong evidence that this is true, at least most of the
time. Second, child and adult labor are substitutes. In fact, children are not as
productive as adults, and adults can do any work that children can do. This
assertion is not an assumption; it is a 昀椀nding of many studies of the
productivity of child laborers in many countries. It is important to emphasize
this, because one rationalization for child labor often heard is that children
have special productive abilities, such as small 昀椀ngers, that make them
important for the production of rugs and other products. However, there is no
support for this view. In essentially every task that has been studied, including
carpet weaving, adult laborers are signi昀椀cantly more productive. As a result,
we can consider the supply of adult and child labor together in an economic
analysis of the problem.
The child labor model is graphed in Figure 8.3. On the x-axis, we have the
would work. At this point, we are on the vertical line labeled TT′, which is the
aggregate labor supply of all the adults and all the children together. This sum
is the number of adults plus the number of children, multiplied by their lower
productivity, γ 6 1. (An S shape in the middle portion is likely, but the analysis
holds even if this is a straight line.) The resulting supply curve for children and
adults together is very di昀昀erent from the standard ones that we usually
consider in basic microeconomics, such as the upward-sloping supply curve
seen in Figure 5.5 (in Chapter 5), but it is highly relevant for the developing-
country child labor context. 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.
Now consider the labor demand curve, DL; if demand is inelastic enough to
cut the AA′ line above wH and also cut the TT′ line below wL, there will be two
stable equilibria, labeled E1 and E2, in the diagram.22 When there are two
equilibria, if we start out at the bad equilibrium E2, an e昀昀ective ban on child
labor will move the region to the good equilibrium E1. Moreover, once the
economy has moved to the new equilibrium, the child labor ban will be self-
enforcing, because by assumption, the new wage is high enough for no family
to have to send its children to work. If poor families coordinate with each
other and refuse to send their children to work, each will be better o昀昀; but in
general, with a large number of families, they will be unable to achieve this.
Banning child labor when there is an alternative equilibrium in which all
children go to school might seem like an irresistible policy, but note that while
all the families of child laborers are better o昀昀, employers may now be worse
o昀昀, because they have to pay a higher wage. Thus, employers may use
political pressure to prevent enactment of child labor laws. In this sense, child
labor, even its worst forms, could actually be Pareto-optimal—a discovery that
should remind us that Pareto optimality is sometimes a very weak condition
on which to base development policy! In the same sense, many other
problems of underdevelopment, including extreme poverty itself, may at
times also be Pareto-optimal, in that solving these problems may make the
rich worse o昀昀.
While these child labor models are probably reasonable depictions of many
developing areas, we do not know enough about conditions in unskilled labor
markets to say how signi昀椀cant these types of multiple equilibria and severe
credit constraints really are as explanations for child labor. Thus, it would be
potentially counterproductive, if even enforceable, to seek an immediate ban
on all child labor in all parts of the world today. As a result, an intermediate
approach is currently dominant in international policy circles.
There are four main approaches to child labor policy current in development
policy. The 昀椀rst recognizes child labor as an expression of poverty and
recommends an emphasis on eliminating poverty rather than directly
addressing child labor; this position is generally associated with the World
Bank (poverty policy is discussed further in Chapters 5, 9, and 15).
Banning child labor when there is an alternative equilibrium in which all
children go to school might seem like an irresistible policy, but note that while
all the families of child laborers are better o昀昀, employers may now be worse
o昀昀, because they have to pay a higher wage. Thus, employers may use
political pressure to prevent enactment of child labor laws. In this sense, child
labor, even its worst forms, could actually be Pareto-optimal—a discovery that
should remind us that Pareto optimality is sometimes a very weak condition
on which to base development policy! In the same sense, many other
problems of underdevelopment, including extreme poverty itself, may at
times also be Pareto-optimal, in that solving these problems may make the
rich worse o昀昀. While these child labor models are probably reasonable
depictions of many developing areas, we do not know enough about
conditions in unskilled labor markets to say how signi昀椀cant these types of
multiple equilibria and severe credit constraints really are as explanations for
child labor. Thus, it would be potentially counterproductive, if even
enforceable, to seek an immediate ban on all child labor in all parts of the
world today. As a result, an intermediate approach is currently dominant in
international policy circles.24 There are four main approaches to child labor
policy current in development policy. The 昀椀rst recognizes child labor as an
expression of poverty and recommends an emphasis on eliminating poverty
rather than directly addressing child labor; this position is generally
associated with the World Bank (poverty policy is discussed further in
Chapters 5, 9, and 15). The second approach emphasizes strategies to get
more children into school, including expanded school places, such as new
village schools, and conditional cash transfer (CCT) incentives to induce
parents to send their children to school, such as the Progresa/Oportunidades
Program in Mexico, discussed in this chapter’s case study, or the experimental
Malawi program discussed in Box 8.5. This strategy has widespread support
from many international agencies and development bodies. It is probably a
more e昀昀ective approach than making basic education compulsory, because
without complementary policies, the incentives to send children to work would
still remain strong and enforcement is likely to be weak, for the same reasons
that regulation of the informal sector has proved almost impossible in many
other cases. Compulsory schooling is a good idea, but it is not by itself a
su昀케cient solution to the problem of child labor. Improving the quality of basic
schooling and increasing accessibility are also very important; the fraction of
national income spent on basic education in a majority of low-income
countries remains problematic. As the ILO points out, In sub-Saharan Africa,
about half of all low-income countries spend less than 4 per-cent of their
national income on education. In South Asia, Bangladesh devotes only 2.6 per-
cent of its national income to education and Pakistan, 2.7 per-cent. India
invests a smaller proportion of GNP (around 3.3 per-cent) than the median for
sub-Saharan Africa, even though average incomes are around one third
higher. Even more worrying is that the share of national income devoted to
education is stagnating or decreasing in key countries, including Bangladesh,
India and Pakistan, which account for over 15 million out-of-school children.25
The third approach considers child labor inevitable, at least in the short run,