Teaching Notes · Economic Development and Growth

Human Capital: Why Health and Education Drive Growth

Human capital is the stock of knowledge, skills, health, and motivation embodied in people, built up through education, training, and healthcare. Like physical capital, it requires upfront investment, tuition, forgone wages, medical costs, and it pays that investment back over time through higher productivity, higher lifetime earnings, and a longer, healthier life. What makes human capital distinctive in development economics is that it plays two roles at once, and keeping both in view at the same time is the key to understanding why education and health sit so close to the center of this field.

An end in itself, and a means to growth

As an end, education and health are inherently valuable. A life with the freedom to be healthy and educated is, in Amartya Sen's capability framework covered in the previous piece in this series, part of what development is actually for. Reducing child mortality matters regardless of what it does to GDP. As a means, education and health are inputs into the economy's production function: a healthier, better educated workforce is simply more productive. A farmer who learns to read is better able to follow instructions for fertilizer use and adopt new techniques, which shows up, eventually, as a measurable increase in crop yield. The two roles reinforce each other, but it is worth remembering that even if the economic payoff were smaller than it is, investing in people would still be justified on its own terms.

A virtuous cycle between health and education

Health and education do not operate independently; investment in one raises the return on investment in the other, creating what is often called a virtuous cycle. A child suffering from malnutrition or intestinal parasites, both common in low income settings, concentrates less well and attends school less often, so investing in something as basic as clean water can immediately raise the effectiveness of schooling. Studies from countries including Nepal and Brazil have found that nutritionally stunted children lag well behind their peers on both test scores and enrollment. Longer life expectancy works in the same direction from the other side: if a worker expects to retire at sixty rather than die at forty five, the expected return on ten or fifteen years of schooling is far higher, which raises the incentive to invest in education in the first place.

The relationship runs the other way too. More educated individuals are more likely to practice preventive health behavior, hand washing, understanding the value of vaccination, seeking prenatal care, and education is itself a prerequisite for training the doctors, nurses, and public health workers a health system depends on. A mother's education level in particular is consistently one of the strongest predictors of her children's health, nutrition, and survival, more so than household income alone.

Why private and social returns diverge

Economists distinguish between the private return to education, what accrues to the individual, and the social return, what accrues to society as a whole. The two often point in different directions, and the gap between them shapes a great deal of education policy.

Because private returns to higher education are often high relative to private costs, thanks in part to heavy government subsidy, demand for university places in many developing countries can run ahead of what is socially optimal, pulling scarce public funds away from primary education, where the social payoff is largest.

Where the market gets it wrong

A few recurring market failures distort how education actually gets used and distributed. Firms frequently use a degree as a cheap screening device to filter job applicants rather than directly assessing skills, which pushes people toward acquiring more credentials than the job itself requires, a pattern known as credentialism, and can leave educated people unemployed anyway. Highly skilled workers, doctors, engineers, scientists, often emigrate from the countries that trained them to wealthier ones that did not, a pattern known as brain drain; several African and Caribbean nations lose a substantial share of their medical graduates this way, which both represents a direct loss of public investment and worsens the shortage of health workers the country was trying to solve by training them in the first place. And persistent gender gaps in education, driven by cultural bias and the perceived opportunity cost of girls' labor at home, remain widespread even though the social return to educating women is demonstrably higher, in lower child mortality, lower fertility, and better educated children in the next generation.

Child labor and the case for conditional cash transfers

Child labor is best understood not as a simple parental choice but as the outcome of poverty combined with a failure in credit markets: poor families cannot borrow against their children's future earnings, so sending a child to work rather than school can be the only way to survive in the short run. Development economists sometimes describe this with a multiple equilibria model. In the bad equilibrium, low household income forces families to rely on child labor, which keeps the family poor and blocks the next generation from accumulating human capital. In the good equilibrium, household income is high enough that families do not need their children's labor, so children attend school instead, breaking the cycle. Because of this, simply banning child labor can backfire, pushing children into worse, unregulated work rather than into classrooms. Effective policy has to address the underlying poverty and create a genuine incentive for families to choose school.

Conditional cash transfer programs are widely regarded as the most effective policy response built around this insight. The government pays poor households a regular cash transfer, conditional on specific human capital investments, usually school attendance and routine health checkups. Mexico's Progresa, later renamed Oportunidades and then Prospera, is the program most often cited as the model: payments continued only if children maintained school attendance and family members attended health and nutrition sessions. Brazil's Bolsa Família is another widely studied example, credited with lifting millions of people out of poverty while improving school enrollment and child health outcomes. These programs work because they attack both constraints at once, providing immediate income relief and a direct incentive for long run human capital investment.

The shift from quantity to quality

Many developing countries have made genuine progress on school enrollment, including narrowing gender gaps at the primary level, yet this quantity gain has not always translated into comparable gains in growth or productivity. The reason, increasingly, is traced to the quality of learning rather than years of schooling: poorly trained teachers, inadequate materials, oversized classrooms, and outdated curricula mean a student can complete several years of primary school and still struggle to read a simple paragraph or do basic arithmetic. Economists such as Eric Hanushek have argued that it is cognitive skills, not years of schooling on their own, that best predict long run economic growth, a finding that has shifted policy attention from simply building more schools toward improving what actually happens inside them.

Disease as a drag on human capital

Beyond headline illnesses, a group of widespread, debilitating conditions known as neglected tropical diseases, intestinal parasites and schistosomiasis among them, rarely kill but chronically reduce productivity and school attendance through fatigue and absenteeism. A large scale school based deworming program in Kenya, studied extensively by development economists, was found to be a remarkably cost effective way to raise both school attendance and future earnings. The HIV and AIDS epidemic that struck Sub Saharan Africa from the 1980s onward offers a starker historical example: it disproportionately killed adults in their prime working years, removing doctors, teachers, and civil servants from the workforce, measurably slowing GDP growth, and leaving behind a generation of orphans whose households had to redirect resources from education toward survival and care.

Does health drive growth, or does growth drive income?

A genuinely unsettled empirical question running through this literature is which way the causal arrow actually points. Does better health raise economic growth, or does economic growth simply buy better health after the fact, through higher incomes and greater access to health services? The honest answer from most of the research is that the relationship runs in both directions at once, and that health is best understood as simultaneously an input to growth and an output of it.

On the input side, a frequently cited production function study by David Bloom, David Canning, and Jaypee Sevilla found that improved health has a positive and statistically significant effect on aggregate output, with a one year improvement in life expectancy associated with roughly a four percent increase in output, a notably large effect once income differences due to average years of schooling are also accounted for. Research specifically on health spending and growth in the Turkish case, by Rahmi Ak, and across the wider Middle East and North Africa region, by Mohsen Mehrara and colleagues, both find a long run relationship between health expenditure and GDP, with the MENA study concluding that income differences across countries were themselves the major factor explaining why health expenditure levels differ so much between them, which points toward growth driving health spending rather than the reverse. A further study by Arusha Cooray found that the effect of health capital on growth is not uniform across income groups: in high and upper middle income countries, both education enrollment and life expectancy show a significant positive effect on growth, while in low and lower middle income countries the effect of life expectancy only becomes significant once it is allowed to interact with education and other health measures, a reminder that the health to growth relationship itself can look different depending on how developed an economy already is.

The practical upshot found broad agreement among these researchers: health should be treated as both an input into economic growth and an output of it at the same time, which means health expenditure can be justified on efficiency grounds, through its effect on labor productivity, and not only on humanitarian or equity grounds. A related but separate strand of this literature, following Bloom's team, studies the private return to education directly through age earnings profiles, the observed relationship between a worker's age, their level of schooling, and their earnings, which consistently shows the earnings gap between more and less educated workers widening over a career, reinforcing why households continue to invest in schooling even where public returns to doing so are debated.

Why a mother's education matters so much

Across many studies, the economic and social rate of return to women's education in developing countries ranks among the highest of any development investment, for a reason that goes beyond a woman's own earnings. Educated mothers, largely independent of household income, tend to have fewer and healthier children, are more likely to see both sons and daughters through school, and make more effective use of basic health and sanitation knowledge. In parts of South and East Asia, this gap in how girls and boys are valued has historically shown up in stark demographic terms, a phenomenon researchers have called the missing women problem. Research summarized in Todaro and Smith's textbook estimates that if gender ratios in Asia matched the more biologically typical ratios observed in regions such as Europe, North America, Latin America, or Sub Saharan Africa, at least one hundred million additional women would be alive in Asia alone, with a much smaller, though still real, version of the same pattern documented in parts of Africa. The causes identified in this research include inferior medical care for girls and gender selective abortion, and the scale of the figure is one of the clearest illustrations of how undervaluing female human capital carries a cost that compounds across generations.

Sources: Chapter 8, “Human Capital: Education and Health in Economic Development,” and the supplementary lecture on health expenditure and growth, following M. P. Todaro and S. C. Smith, Economic Development (Pearson); D. E. Bloom, D. Canning, and J. Sevilla, “The Effect of Health on Economic Growth: A Production Function Approach,” World Development 32(1), 2004; R. Ak, “The Relationship between Health Expenditures and Economic Growth: Turkish Case,” International Journal of Business Management and Economic Research 3(1), 2012; M. Mehrara et al., “The Relationship between Health Expenditures and Economic Growth in MENA Countries,” International Journal of Business Management and Economic Research 3(1), 2012; A. Cooray, “Does Health Capital Have Differential Effects on Economic Growth?” Applied Economics Letters 20, 2013; E. A. Hanushek and L. Woessmann on cognitive skills and growth; M. Kremer and colleagues on the Kenya deworming program; Mexico's Secretaría de Desarrollo Social on Prospera; and Brazil's Ministério do Desenvolvimento Social on Bolsa Família.