Human Capital Expenditure and Income in Developing Countries

Health and education are crucial in human capital development. While they are basic needs and are thus desirable for their own sake, they are also among the most basic economic development objectives. Health is synonymous with human welfare, and education is essential for a fulfilling life. Therefore, health and education are central to the idea of enhancement of individual potentials that lie at the heart of the meaning of economic development. Health and education are also intrinsically related. Good health is important for a successful education, and education and literacy are essential for good health. The world community has acknowledged the crucial importance of health and education and has made policy priority to improve health and education to fight poverty. This study explores the impact of expenditures on education and health on income per capita in developing countries. Accounting for cross-sectional dependence and using the fixed-effects and instrumental variables approaches, our results indicate that health and education expenditures explain variations in income per capita in developing countries. While these results suggest that spending on health and education contributes to economic growth, education's contribution is far more important. We also find that the effects of health and education expenditures on income do not vary qualitatively across income groups, except in the Middle East and North Africa. Finally, the effects of education and health expenditures appear to vary across regions. Note that regardless of the sample entity considered, the magnitude of the effect of education expenditure across our different regressions is generally higher than that of health. This suggests that a dollar spent on education is likely to yield higher returns to economic growth. However, this finding does not imply that spending on health is less important since our results suggest that advancing human capital through health expenditure is vital for economic growth, except in the Middle East and North Africa region. Moreover, considering that investment in education tends to provide longer-term benefits relative to the shorter-term benefits of investment in health, our results could also imply that longer-term investment is more conducive to economic growth than shorter-term investment. Policymakers in developing countries should make the highest priority to improving investment in these two dimensions of human capital.