Prioritise investment in human capital | The Daily Star
12:00 AM, May 10, 2019 / LAST MODIFIED: 12:31 AM, May 10, 2019

Prioritise investment in human capital

Education and health play key roles in human capital formation. Investment in human capital formation is considered a means of improving the quality of life and sustaining economic growth. Education and health are regarded as critical pathways to economic development as they increase the productivity of individuals and generate skilled labour force.

Education and health are considered merit goods. A merit good is a commodity or service that is regarded by society or government as deserving public finance. Merit goods create positive externalities when consumed and have spill-over benefits which can have a significant effect on social welfare. In the case of education and health, in most of the countries, there are clear cases of market failure, as education and health are under-consumed under free market conditions. The market prices of education and health services can be awfully high to prevent individuals to invest in human capital. It should also be highlighted that access to education and health services is considered as part of basic human rights. It is also important to reemphasise that mere economic growth doesn’t ensure economic development if human development is undermined in the growth process. Education and health are the two critical aspects of human development. In this context, in compensating for the failure of markets to supply merit goods, like education and health, governments have a crucial role in allocating resources to education and healthcare.

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Sustainable Development Goals (SDGs) also elaborate on two specific goals related to education and health. SDG 3 emphasises on ensuring healthy lives and promoting wellbeing for all at all ages, and SDG 4 highlights the importance of ensuring inclusive and equitable quality education and promoting lifelong learning opportunities for all. The success of achieving both these goals in most of the developing countries critically hinges on the substantial sizes of public expenditure on education and healthcare and their efficient uses.

According to the latest year of data, on average, global spending on education and health, as shares of Gross Domestic Product (GDP), are at 4.7 percent and 4.2 percent respectively. We have calculated the magnitudes of the shortfall of the countries compared to these averages. For this, we have considered the average of public expenditure as a percentage of GDP for the period 2014-2018. In general, we find that most of the developing countries, especially the least developed countries, are the poor performers, while the European, North American and other advanced developing countries are good performers.

In the case of public education expenditure, our analysis shows that out of 154 countries, 82 countries fall short of the global average of 4.7 percent of GDP. Among the 25 worst performing countries, we can see the dominance of developing countries from Asia and Sub-Saharan Africa. Three South Asian countries, namely Bangladesh, Pakistan and Sri Lanka are among the 25 worst performing countries.

In the case of public health expenditure, out of 188 countries, 62 countries fall short of the global average of 4.2 percent of GDP. Again, among the 25 worst performing countries, we can see the dominance of developing countries from Asia and Sub-Saharan Africa. Five South Asian countries, namely Afghanistan, Bangladesh, Pakistan, India and Nepal are among the 25 worst performing countries.

One obvious implication of the low public expenditure on education and health is the high degree of out-of-pocket education and health expenditure in these countries. There is no denying that the high degree of out-of-pocket education and health expenditure means that the burden of expenditure heavily falls on the individuals where the government takes much lesser responsibility. For example, in the case of the percentage share of out-of-pocket health expenditure in total health expenditure, among the 25 worst performing countries five South Asian countries are Afghanistan (75 percent), Bangladesh (70 percent), India (66 percent), Pakistan (66 percent) and Nepal (59 percent).

Cross-country experiences suggest that a low degree of public expenditure on education and health contributes to a low level of education and health achievements, and a high degree of poverty and inequality. A recent UNESCAP report titled “Social Outlook for Asia and the Pacific: Poorly Protected”, published in September 2018, highlights the importance of increased social spending to accelerate poverty reduction. We contributed some analysis to this report using economy-wide general equilibrium models for 26 Asia Pacific countries. Our analysis shows that most of the Asia Pacific countries fall significantly short of the global averages of public education and health expenditure. If these countries can increase the public expenditure on education and health as percentages of GDP as per the global averages, by 2030, most of these countries will be able to substantially reduce poverty based on the USD 1.9 poverty line income.

Then, why do the governments of some countries spend low on education and health? There are two specific reasons: First, many of these countries have weak state capacity in mobilising tax revenues. If we look at the worst performing countries in terms of public education and health expenditures, most of these countries have very low tax-GDP ratios. Inefficient tax infrastructure, complex tax laws, poor coverage and corruption are the main causes of low tax collection. Second, even with the low tax-GDP ratios, many countries suffer from the problem of not getting their priorities right when it comes to the allocation of public resources. Many countries spend quite high in the military. For example, many of the worst performers from Sub-Sharan African countries have military spending as a percentage of GDP between 3 percent and 5 percent. In the case of South Asia, the figures are 1.4 percent for Bangladesh, 2.5 percent for India, 3.5 percent for Pakistan, 1.6 percent for Nepal, and 2.3 percent for Sri Lanka. Troubled political relations with the neighbouring countries, geopolitical and regional political dynamics and growing threats of extremism compel countries to divert resources from the vital social sectors to military spending.

It should also be mentioned that many developing countries suffer from leakages in the system which result in corrupt practices, thus whatever is spent by the government on education and healthcare, a large part of it doesn’t reach the targeted beneficiaries. There are also regional disparities in the allocation of public resources for education and health. It should be kept in mind that in a system of crony capitalism and high degree of rent-seeking activities, human development and human capital formation fail to get their deserved priorities.


Dr Selim Raihan is Professor, Department of Economics, University of Dhaka, Bangladesh, and Executive Director, South Asian Network on Economic Modeling (SANEM).


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