Human Capital. Human capital includes the education, skills and health of workers.
Maybe the most important factor in the development of an LDC is investment in human capital. An improvement in human capital directly impacts on development as it affects the income, health, living standards and social and political freedoms of an LDC’s population. Human capital is key for an LDC’s long-run growth and self-sufficiency.
An investment in education means workers’ skills improve and they become more efficient so they can produce more, the economy’s PPF shifts outwards and real GDP rises. Also, workers are better educated so they can adapt and work with machinery and new technology, this helps an economy to develop its manufacture sector.
Rapid growth of the East Asian Tigers South Korea, Taiwan, Singapore and Hong Kong was driven by investment in the manufacture sector but also human capital. Investment in education allowed a skilled labour force to develop and operate the machinery in the manufacture sector. In 1950, Taiwan made 6 years of education compulsory and extended this to 9 years in 1968, an emphasis was placed on female education. Between 1960-2000, Taiwan’s annual economic growth rate averaged 7%.
Additionally, because workers’ skills improve, their marginal productivity of labour rises so they should be able to obtain better jobs and earn higher wages. A higher income means workers can buy more goods and services so living standards rise. Also, better literacy and numeracy means people can read and write so they can enjoy social and political freedoms.
Moreover, an improvement in education means that people are smarter and may innovate, invent and develop new technology. This has positive spill-overs because society will benefit from new technology.
An improvement in hospitals and healthcare means more people will be cured of diseases, there will be less illnesses and life expectancy rises. Better health means people can work longer and more efficiently aswell so labour productivity rises, the economy’s productive capacity increases and real GDP rises.
Furthermore, if females are given at least a basic primary education in literacy, numeracy and health then future generations will have a better education and health. Female education is key for the development of future generations. Robin Jeffery posits that “literate men have literate sons, literate women have literate children.”
However, there are some drawbacks to investment in human capital:
- A large investment may be required. LDCs may not have the funds to do this. People will need to save but this means a decrease in current consumption which is near impossible given that people will be living close to poverty.
- After people are educated they are ready to work so LDCs must also incentivize domestic firms to invest, attract MNCs and develop the infrastructure to create jobs.
- LDCs could suffer brain drain. Maybe LDCs educate their population and then the educated workers leave to earn higher wages in developed countries. The initial educational investment then goes to waste.
- Income inequality may rise. LDCs must focus on basic education (for example, literacy, numeracy and health) so that the most vulnerable members of society benefit. If instead LDCs invest in universities then this most likely only benefits the rich and allows them to earn higher incomes while the poor do not benefit, so income distribution worsens.