Session 11

Human Development Report, 1996, Ch. 3, 66-85

Chapter 3: Links between growth and human development

Summary: This report discusses the link between economic growth and human capital. Generally, economic growth and human development move together and are mutually reinforcing in the long-run. However, economic growth does not invariably and automatically translate into human development. Countries differ in their human development efficiency, or in how well they translate income into human development. Links between human development and economic growth can be mutually reinforcing. When links are strong, they contribute to each other. When weak, one can undermine the other. Unbalanced links are the result of rapid human development with little growth or of fast growth with slow human development. While economic growth is generally found to positively impact several human development indicators, we cannot say that economic growth will invariably and automatically translate to human development if other important factors are not in place. The report makes several suggestions for strengthening links between growth and human development.

Link between economic growth and human development not automatic, but can be strengthened through sensible policy actions.

Human development requires considerable investment in education, health, and nutrition. Result: healthier, better educated population that is capable of being economically more productive.

Growth also linked to other elements of human development such as

· political freedom

· cultural heritage

· environmental sustainability

The report identifies two main sets of links between economic growth and human development:

· The effect of growth in household income and spending on human development

· The effect of growth on government policies and expenditures.

Household activities (mostly unpaid and largely invisible to national accounts) contributing to human development:

Women do most of these activities – managing the household, raising children, caring for the sick and elderly, work in voluntary organizations that contribute to health, nutrition, and education. The value of this work was estimated in 95 to be $11 trillion globally.

Educational attainment: Increases in income are associated with improvements for several reasons. Families can spend more on school materials and are more likely to send children to school. As incomes increase, families are in a better position to exert political pressure for better schools. Wealthier families are able to create an environment more conducive to learning both at home and at school. (Cautions against just looking at improvements in school enrollment because it may understate the benefits).

Health: Higher household income is associated with higher height-for-age ratios, survival rates, life expectancy at birth, reduced illness among children. In several studies, income effects seem to be higher in urban than rural areas. The full benefits of increased income cannot be realized in rural areas because there are fewer healthcare facilities.

Combining income with greater education: Per capita income and adult literacy are the most important indicators of life expectancy. The choices that families make in spending their income depend on personal preferences, education, community knowledge, and customs. Also, several studies suggest income is more likely to be spent on human development when women control the purse strings. One reason may be that the increased income is less likely to be spent on cigarettes and alcohol. In addition, increasing educational attainment of women also has strong effects on children’s health and nutritional status.

Government Policies and Expenditures:

There are several economic arguments for using government policies to improve human development. Lack of investment in human capital can be seen as a market failure, which government activity can help to correct.

Examples of Market Failures in Investment in Human Development:

· Credit for human development is often lacking because lenders cannot stake a future claim on human capital. Consequently, people who might want to borrow for education and health often cannot do so, especially if they are poor.

· Failures in information flows often lead the poor to invest less in health and education than they would prefer if they had full information.

· Human capital has externalities not reflected in the private returns of households and firms.

· Several benefits of human development have social benefits that are not directed compensated for monetarily (education can help contain infectious diseases).

? Governments can improve human capital by making loans for such activities available and by improving information flow.

In principle, growth should lead governments to give more support to human development. In reality, countries differ in the following ways:

· Public-expenditure ratio: averages about 20-30% for developing countries but ranges from 5% to 60%. Depends largely upon ability and willingness of governments to collect taxes. Taxes in developing countries are only about 10-20%, half that of industrialized countries.

· Social allocation ratio: percentage of public expenditure earmarked for social sectors (health, education, social security, water supply, sanitation) – averages about 20% for 61 countries studied.

· Social priority ratio: percentage of social expenditure devoted to basic social services (basic education, basic healthcare and nutrition, low-cost water supply and sanitation). Depends upon governments’ political objectives and pressure of different interest groups. Averaged 24% in 1980s for 12 countries studied, with a range from 11% to 55%. Generally, the more basic social services the government supports, the better off the poor.

Even if these ratios remain the same when a country is growing, spending for basic social services can increase but only with increases in government expenditure. Countries have been able to increase spending on human development during economic declines (e.g., Nicaragua in the 1980s), but such expenditures are not sustainable without growth.

Diversion of Government Spending

· Many countries squander large amounts on items that do nothing for human development (e.g., military expenditures).

· Due to political pressures, governments often skew expenditures toward the rich. Examples: subsidies to tertiary education made at the expense of primary education, spending toward high-tech hospitals for the affluent at the expense of basic healthcare in rural areas, corruption.

· Demands by international lenders for repayment of debt.

· Aid donors often show little interest in social services, particularly in basic health services.

- 20:20 initiative is one solution. It requires 20% of aid flows and 20% of developing country budgets to be earmarked for basic social services.

Making Expenditure Effective

· Decentralization: handing down responsibility of public services to local governments can make them more efficient and give local people greater voice in their planning and operations.

· Efficient Allocation : expenditure on basic services usually has greater impact on human development than on tertiary education or curative medical services

· Complementary Inputs : education often needs to be combined with other services to make them effective. Educating girls also contributes to increases in child survival rates and decreasing fertility rates.

Strengthening the Links from Growth to Human Development

This section concludes by saying that for human development to improve, growth must be equitable and employment-generating. Governments must give priority to social spending, particularly for basic services. People must have access to productive assets, such as land, credit, and physical infrastructure. Governments must also maintain good governance by enabling people to share the benefits of growth and allowing them to participate extensively in public life. Finally, NGOs and community groups can play a vital community action role by supplementing government and playing an advocacy role.

Links from Human Development to Growth

This section identifies ways in which human development improvements can lead to economic benefits. “Healthy, well-educated people make an economy more productive.” Some of the clearest economic benefits of human development arise from making workers, especially poorer workers, more productive by improving their nutrition, health, and education. Increases in access to education may also make income distribution more equitable. Total returns from education tend to be higher for women than for men.

· Technology: In agriculture, farmers with education are more likely to adopt modern fertilizers and to learn from their own and others’ experiences. In industry, workers must be sufficiently educated to adapt to and disseminate new technology. On-the-job training by employers is particularly important for this. At higher levels of technology, educated personnel are necessary for research and development.

· Trade: Countries with higher-skilled workers can have comparative advantages in exporting manufactures – these skills are particularly important for countries with few natural resources so therefore need an alternative form of comparative advantage.

· Savings and Investment: Government efforts to promote savings must be complemented with education. One problem of foreign investment coming from capital flows rather than official development assistance is that private flows tend to ignore countries with low human development. In several countries, a large portion of human development expenditures comes from official development assistance.

Strong, Weak, and Unbalanced Links

· Strong Links: Countries have rapid advances in both economic growth and human development. Progress in human development and economic growth mutually reinforce each other (e.g., Japan, Hong Kong, Malaysia, South Korea, Singapore, Spain, Portugal, Botswana).

· Weak Links: Countries have both slow economic growth and human development progress, with each undermining the other. Most of the least developed countries are in this category.

· Unbalanced Links: Rapid economic growth but slow human development progress (e.g., Egypt, Lesotho, Pakistan). Or rapid human development but slow growth. This is not sustainable in the long-run (e.g., Costa Rica, Jamaica, Peru, Sri Lanka, state of Kerala in India). Countries with unbalanced links are more unstable in the long-run than those with weak or stong links between growth and human development. In the long-run, countries tend to converge toward either strong or weak links. However, several countries have successfully switched from weak links to strong over the last three decades (Botswana, Sri Lanka, China, Indonesia).

Policy Recommendations for Countries with Weak Links

· improve minimum literacy and primary education

· improve income distribution by focusing on employment creation and poverty reduction

· restructure public and private resources to gear more resources to basic health, primary education, nutrition, and family planning

· allocate budgetary subsidies to social programs that benefit the masses rather a few elites, provide transparent breakdown of budgets to show who the real beneficiaries are

Policy Recommendations for Countries with Strong Links

· challenge is to give even more attention to human development including poverty reduction, human rights, and environmental conservation and regeneration.

· target segments of the population that have not fully benefited from overall progress in human development and growth, such as women

· advance higher levels of human development, such as tertiary education

Policy Recommendations for Countries with Unbalanced Links

For Countries with Fast Growth and Slow Human Development:

· improve distribution of public and private resources by emphasizing job creation and productivity growth, redistributing productive assets

· make more equitable the distribution of human capital by investing in education

· reallocate public expenditures to ensure that basic needs are met, provide transparent breakdown of budgets to show who real beneficiaries are

For Countries with Slow Growth and Fast Human Development

· promote skill-intensive productive activities for exports

· strengthen link between science and technology institutions and needs of economy

Page 4 of 4