Inputs and outputs: health, education and development

Samik Chowdhury

To understand the importance of health and education in the growth of a country, we need to answer a few fundamental questions. What do we mean by growth? How do we measure it? What are the factors that contribute to growth?

Countries are not naturally endowed with all goods and services, they have to produce them. Production essentially is a process of transforming inputs into outputs. The total value of goods and services (output) produced in an economy in a year is known as the Gross Domestic Product (GDP) of that economy. This is the “production approach” or the “output approach” to measuring GDP.

gdp The key inputs (or factors) that go into production are a combination of fixed and variable factors, namely land, labour, capital, and organization. The GDP of a country can alternately be measured by adding up the incomes of all the factors of production, i.e., rent for land, wage for labour, interest for capital, and profit for organization. This is called the “income approach” of measuring GDP which is the mirror equivalent of the production/output approach. The rationale is that the entire income earned within a country in a year by all factors of production will be spent on final goods and services produced within the country in that year. Therefore the total value of the goods and services produced must be equal to the total income, which is the GDP of the country.

Economic growth implies an increase in the value (i.e., price x quantity) of the output (goods and services) produced in a country over a period of time, usually a year. Growth is generally measured by the percentage increase or decrease in the GDP of a country in a given year with respect to a previous year (base year) of choice. Thus, the economy of a country displays positive growth when its GDP in a particular year is greater than that in the base year.

While some of the inputs (e.g. land) in production remain fixed in the short run, in the long run they are all variable. The relative importance of an input in the production process depends on its availability and hence is different for different countries. For example, in a highly populous developing country like India, labour is relatively abundant and therefore the most extensively used variable input in the production process. However, mere availability of labour does not ensure high employment and output. Even if there are adequate employment opportunities, the available labour has to be employable and therefore, along with quantity, the quality of labour becomes a critical factor that determines economic growth. This forms the basis of the “human capital” approach to economic growth.

Human capital corresponds to any stock of knowledge or characteristics the worker has (either innate or acquired) that contributes to his or her “productivity”. Health and education are therefore the most important aspects of human capital because they both directly and indirectly impact the efficiency of a worker. A labour force that is unhealthy raises the risk of lost man days due to sickness which has an adverse impact on the output and eventually the economic growth of a nation. Low health status also adversely affects the ability to comprehend and concentrate, leading to low productivity at the workplace, if not absenteeism. Basic education on the other hand, assists workers in interpreting instructions in an appropriate manner and communicating with colleagues and superiors effectively. Thus, cognitive abilities of the labour force are severely constrained in the absence of good health and basic education. Collectively therefore, higher levels of health and education have the potential to generate higher output for the nation.

Good health and education also generates positive externalities within the society and economy. For example, treating someone for a contagious disease provides considerable benefit to others by restricting the spread of this disease. Similarly, an educated person can inspire others in her community to conserve a scarce resource like water or stop open defecation. All these can have a direct and indirect impact on economic growth.

While basic health and education are the necessary conditions for a productive labour force, they are by no means the sufficient conditions. As countries grow, the quantity and quality of goods and services demanded by the population undergoes a transformation. Today’s luxuries becoming tomorrow’s necessities is a regular occurrence along the path of a country’s progress. This, therefore, calls for mass production of goods and services, leading to mechanization of the production processes. This leads to two types of demand – heavy machine equipment (also called capital goods) to assist the production process and workers with better skills and technical knowledge to work those machines. While the initial demand for heavy machines can be addressed through imports, sustainability and self-sufficiency requires capital goods to be produced at home. The human resource requirement in such a scenario is very different from what basic education and health can offer. There emerges a need for specialized technical education and specific management skills relevant to the economy of the day. This would require institutions for secondary, higher, technical, and management education, a fact well-recognized by the policy makers of independent India. The decade of the 50s and 60s saw the setting up of the prestigious Indian Institute of Technologies (IIT), the Indian Institute of Managements (IIM) and other centres of higher education. Industrial Training Institutes (ITI) were also established during the same time to ensure a steady flow of skilled workers for the domestic industry and to cultivate a technical and industrial attitude in the younger generation. The demand for skilled labour has been growing exponentially in India especially after economic liberalization (1991) when international businesses set up production facilities within the country to take advantage of the relatively cheap labour and the hitherto repressed consumer demand for the final product. The government of the day responded by setting up new institutions of higher education and initiating programmes on skill development to supplement the conventional system of education.

The epidemiological profile of a country also undergoes a transition over time. Communicable diseases like malaria, cholera, tetanus, TB, etc., wiped out generations of potential workers in the early part of the 20th century. In 1947 our life expectancy of birth was a mere 32, an age when a worker is probably at the peak of his productive capacity. The situation became better post-independence thanks to improved nutrition, better sanitation, innovations in medical technologies, and the establishment of a three tiered public health system to deliver health services. Over the years, however, our public health system got chronically underfunded. For quite some time now the government has been spending just about one percent of its GDP on health, which is way below other countries with similar levels of GDP. This has resulted in a public health system that is inefficient, ill-equipped, understaffed, and hostile to health seekers. As a consequence people are exposed to a highly unregulated private health care market, where treatment costs are high but the quality of treatment, uncertain. Unlike education, returns to health are difficult to measure and therefore we have been guilty of neglecting this crucial aspect. Additionally, we now face a new threat of non-communicable lifestyle diseases such as cancer, diabetes, and cardio-vascular diseases which inflict a huge cost on the economy in terms of productivity loss.

health-&-education Regional imbalance in development, i.e., the co-existence of developed states like Gujarat, Kerala, and Tamil Nadu with backward states like Bihar, Uttar Pradesh, and Madhya Pradesh is one of the biggest challenges in India today. A lot of this imbalance can be explained by the dissimilarities in the quality of human resource across states. While labour in the developed states is equipped to work in productive sectors like manufacturing industries and services, information technology, banking, commerce, and financial services, the less developed states have a majority of their labour force engaged in the low productive agriculture sector or are unemployed. The private sector, guided by pecuniary incentives, prefers to set up businesses in developed states which can ensure a steady supply of quality human resource among other things. As a result, the gap continues to widen with backward states having to deal with problems of unemployment, poverty, distressed migration, and crime among its youth. The only enduring solution to this problem seems to be a combination of more public provisioning of merit goods like health, education, and skill development to the youth of these backward states along with incentives for the private sector to set up their operations in these states.

Census data shows that India’s working age population (15-64 years) is now 63.4 percent of the total, as against 60 percent in 2001. The proportion of those in the 15-19 and 20-24 age groups has risen since 2001. The numbers also show that the ‘dependency ratio’ – the ratio of children (0-14) and the elderly (65 plus) on those in the working age – has shrunk further to 0.55. This has been proudly termed as ‘demographic dividend’ because this indicates that more people have the potential to be productive and contribute to the growth of the economy, relative to the dependents. However, the key issue in terms of a demographic dividend is whether this growing youth bulge has the right skills for the workforce. Otherwise this could well turn into a demographic curse.

Getting the equation right

After completing your education, your income will be determined largely by what kind of job you do. If you become a software engineer (SE), you will earn more than if you become an office assistant (OA). This is because the good or service produced by the SE is generally of higher market value (price x quantity) than that produced by the OA, assuming that they devote the same time to their respective work. So by the “output approach”, you contribute more to the GDP of your country if you are an SE rather than an OA. By the “income approach” too, an SE contributes more to the GDP, simply because he receives a higher income/wage than an OA. So then, there are two important questions to be considered here in terms of labour and productivity. First, why is it that an SE earns more than an OA? Second, what determines whether you become an SE or an OA? The answer to the first question depends on supply and demand. The supply and demand for labour determines the wages paid to workers. In this case the justification for the observed wage differential is that the SEs are relatively in lesser supply than OAs and therefore employers are prepared to pay a higher wage to hire them. The answer to the second question, however, depends on the level of human capital that a worker possesses. While all of you would possibly graduate from a college after schooling, not all would pursue a higher technical degree in software engineering. There may be many reasons for that – orientation, aptitude, financial, or simply choice. No matter what the reason, those of you who would opt for the higher technical degree would be better placed in terms of job prospects and the associated remuneration. This would place you amidst a rare group of individuals with a specialized knowledge, which is in demand. A country with more of such educated and skilled manpower should ideally be more productive in terms of the value of goods and services that are produced within its boundaries. In other words, such countries would have a higher GDP. This is how education and skill enhancement contribute to the economic growth of a country. The level of education and skills as an explanatory factor behind wage differentials has been found to be historically and universally true for all countries, at every stage of development. While the relationship between health and economic growth is not as palpable, a simplistic assessment could tell you that your degrees and skills could count for little if you are not physically and mentally fit enough to put them to use. At a macro level too the financial implications of morbidity or mortality can be severe on account of a contraction in labour force, loss of man-days, diversion of scarce national resources away from productive sectors. All such responses have a long term impact on the health of the economy. In fact, there are numerous empirical studies that have demonstrated the adverse impact of the HIV/AIDS epidemic on African economies.

Questions for you

  • Find out which are the sectors of employment that have the greatest demand. Why do you think so?
  • Which are the different sectors of an economy? What is the contribution of these sectors to the overall GDP of India?
  • Based on an informal survey in your own family or neighbourhood, try to find out for yourself the relationship between education and employment potential.
  • Through a similar survey try and compute the direct (treatment cost) and indirect (lost wages) cost of illness.

The author is Assistant Professor at the Institute of Economic Growth, Delhi. He can be reached at [email protected].

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