Thursday, April 17, 2014

Week 6: Macroeconomics, Growth and the Value of Investing in Human Capital

Macroeconomics is the overall study of entire economies and how they behave including the cycles of peaks and troughs as well as what causes them in both the long and short term.  It also involves the examination of employment rates, inflation, growth and trade.

There are two schools of thought:
  • The Neoclassic (or Chicago) School, which holds the belief that governments should not interfere or play any role in financial markets because they function better without outside involvement.
  • The New Keynesian School, which believes that governments should play a role in markets, helping to stimulate and stabilize economies, minimizing the impacts of recessions and preventing/monitor monopolies to reduce negative repercussions for countries and their populations. 
 So how do markets work?  How do they continue to grow and increase their output?  That's what growth theories try to explain.

The basics of economic growth are that saving, investment and population growth influence input factors including the size of the workforce, capital stock and technology which in turn determine output or production.

There are two main growth theories: the Neoclassical Growth Model and the Endogenous Growth Model.

I've tried to sum up the two models as I understand them:

The Neoclassical (or Exogenous) Growth Model, which assumes that people will continue to saving the same amount over time.  Based on the principle of diminishing returns, both savings and production will eventually flatten out in this model while the investment required will keep growing exponentially.  Unfortunately, this model fails to take into consideration the impacts of technology.

The Endogenous Growth Model, which states that savings is always larger than the investment needed and does not in fact flat line (i.e. the people do not continue saving the same amount of money from what they make), but continues growing exponentially and so does production.  This model does factor in the influence technology on growing the economy.  But, this model violates microeconomic principles and suggests that eventually all sectors will be ruled by monopolies.

Ultimately it was important that a few things happen, among them:
  1. That other elements such as technological developments and social benefits (including human capital i.e. improvements in education and health) be factored into the equation and
  2. That private returns from capital investment and social returns be accounted for individually.  The premise being that some of the benefits don't go to the private sector, but instead leak out and are enjoyed by the rest of society (for example an innovation that sparks the development of other products).
It is important to acknowledge that we continue to see technological advancements that change the landscape of markets, providing more and more opportunities and helping to push economies forward.

There are also spill over effects from innovation and investment in human capital.  For example, investing in education might lead to someone learning something that helps them invent a product or think of a service that should be provided for people.  That new product or service might trigger the idea for another related product or service in someone else and so on and so on.

Bloom and Canning (2008) presented several arguments for health as an investment good, with which I definitely agree:

  • Investing in education and health generally results in healthier people who are more productive and conscientious (as well as capable) of saving for the future and building bigger, more sustainable enterprises because they live longer.   
  • Healthy people are sick less often and therefore take fewer days off from school and work.  When they are present, they are more effective thanks to higher energy levels and the ability to focus better.  They gain more experience over time and are usually more concerned with increasing their knowledge through education and training to improve their employment prospects and creative abilities.  As a result, they learn more, develop better products and services, have higher wages and go on to raise healthy, educated children that contribute to the economy as well as society.  
  • A healthy and well-educated society attracts more investment because it has the capability of being more productive. 

We can use this information regarding the links between health, education, income and the economy to examine why countries in sub-Saharan Africa have struggled with crippling poverty and very little growth for so long.  The region continues to be the most affected by HIV/AIDS, tuberculosis and malaria in the world.  That burden, compounded by political instability, high rates of violence and civil unrest has severely impeded the ability of people to consistently attend school and work, let alone perform well.  In fact, a review of studies performed by Russell (2004) concluded that the direct (i.e. medical costs) and indirect costs (i.e. lost wages) of TB and HIV/AIDS amounted to more than 10% of the household's income on average in profoundly disadvantaged settings like those common in sub-Saharan Africa.  Such a massive amount of lost income can be disastrous, especially for families who are already living in poverty.  In addition, the majority of the populations in the region see very little financial or social returns on the many natural resources extracted from these countries thanks to corrupt individuals, businesses and governments.

The combination of poverty and poor health can be passed from one generation to the next through a number of ways, thereby also compromising the future productivity and economic growth of a country.  Parents who have limited knowledge and earn less (either because of poor health and/or a lack of education/experience), have fewer resources with which to provide their families access to proper healthcare, nutritious food, clean water, a safe living environment and hygiene and sanitation.  Consequently, their children are also more likely to suffer from poor health, which has been shown to be related to increased absenteeism from school and therefore missed learning opportunities as well as lower levels of intellectual development (Bloom, Canning & Jamison 2004; Currie 2009).  Even when these children are in school, they may have more difficulty focusing and performing to the best of their abilities because they feel unwell or have lower energy levels.  Parents could be forced to frequently take time off of work to care for their sick children, potentially reducing their income even further if they do not have carer's leave (Currie 2009).  To make matters worse, poor health conditions from childhood could persist into adulthood.  All of these factors negatively impact the younger generation's ability to work efficiently, further their education, find decent employment and earn money as adults so that they can take care of themselves and their families, thus perpetuating the vicious cycle.  In fact, evidence has shown that individuals who were unhealthy as children go on to lead shorter and less productive lives (Bloom, Canning & Jamison 2004; Hodge 2014b)

In developing countries, the intergenerational effects of poor health and poverty are magnified by very limited or even non-existent social services.  In many cases when a family is struck by illness, older children (especially girls) become caregivers for younger siblings, their parents and even grandparents and therefore may miss out on going to school often or even altogether (UNFPA n.d.; Kangethe 2010).  Without outside intervention, the same issues almost inevitably repeat themselves when these children who have not had the benefit of a complete and thorough education go on to have children of their own (often at a very young age) and must try to support their families.

There is some evidence to suggest that the intergenerational cycle of poverty may begin during pregnancy (Currie 2009).  The "fetal programming hypothesis" theorizes that the environment in utero can result in changes in the epigenome that lead to disease, however this is very difficult to prove as the resulting conditions can take years to surface (Petronis 2010).  A study published in 2007 found that women from low socioeconomic areas of California had a 6% greater chance of giving birth to low weight babies (Curry & Moretti).  The women in this cohort were also more likely to have had low birth weights themselves as infants.  The decreased birth weights reported in this case could be attributed to poor nutrition during pregnancy and/or reduced levels of maternal education associated with low socioeconomic status (Currie 2009; Hodge 2014).  These findings becomes particularly pertinent when coupled with data from the UK indicating that individuals born in 1958 with low birth weights were more likely to be unemployed in adulthood (Currie & Hyson 1999; Case, Fertig & Paxson 2005).

It is quite clear that without efforts to address inequalities between socioeconomic groups, there is a strong probability that parents who are affected by ill health, poor levels of education and poverty will pass those issues on to their children.

So with all of this information in mind, why did the Australian Prime Minister promise to invest in infrastructure including roads, bridges, airports, railways and ports in his election campaign? Should he have mentioned investing in anything else?

Solid infrastructure such as roads and railways, etc enable economic growth as it makes the transport of people and goods easier, safer and faster.  Mr. Abbott undoubtedly knew that the populous would be supportive of better mobility, which is why he was so keen to include that promise as part of his campaign platform.  But, there is a saturation point at which point the benefits cease to continue expanding for each individual transport-related improvement.

Mr. Abbott should have included health and education-related infrastructure such as schools and hospitals in his investment plans seeing as human capital has so many benefits for sustaining long-term economic growth and staving off stagnation. 

A short story from my archives:

When I was in Uganda, I became infected with malaria and soon learned just how disruptive the effects of illness can be.  It was so commonplace there that every time someone was sick, everyone (especially locals) would instantly assume that it was malaria and most foreigners who were there for an extended period of time considered it a right of passage.  When I had it, I could barely function.  I struggled to get out of bed and made it halfway to work at which point I realized that I only had enough energy left to make it back home.  We had planned a weekend tour of the Queen Elizabeth National Park and I was only able to wake up for short periods of time to take pictures before going back to sleep in the back of the van.

This is one of those pictures.  The bags under my eyes show just how thoroughly exhausted I was by the illness.

Even after receiving treatment, it took me quite a while to get my energy levels back to normal so that I could go back to work on a more full-time basis and feel like I was really present and actively contributing.  Evidently, I should have been more diligent in my prevention efforts instead of allowing myself to become so blasé about getting malaria, but it was difficult to keep myself from falling in with the local mindset, especially when the side effects of my antimalarials were so strong and undesirable. 

Investing in people through health and education is evidently worthwhile from all perspectives, including those related to economic growth.



Bloom DE & Canning D 2008, Population Health and Economic
Growth, Commission on Growth and Development Working Paper No. 24.
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Bloom DE, Canning D & Jamison DR 2004, ‘Health, wealth and welfare’, Finance and Development, vol. 41, no. 1, pp. 10-15.  Available from: <>. [6 May 2014].

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Currie J & Moretti E, ‘Biology as Destiny? Short and Long-Run Determinants of Intergenerational Transmission of Birth Weight’, Journal of Labor Economics, vol. 25, no. 2, pp. 231-264.  Available from: <>. [7 May 2014].  

Currie J 2009, ‘Healthy, wealthy, and wise: Socioeconomic status, poor health in childhood, and human capital development’, Journal of Economic Literature, vol. 47, no. 1, pp. 87-122.  Available from: <>. [7 May 2014].

Hodge A 2014, Topic 6: Health and Economic Development from a Micro Perspective, lecture notes distributed in Health and Development PUBH7113 at The University of Queensland, Brisbane, 16 April 2014.

Kangethe S 2010, 'The Dangers of Involving Children as Family Caregivers of Palliative Home-Based-Care to Advanced HIV/AIDS Patients', Indian Journal of Palliative Care, vol. 16, no. 3, pp. 117-122.  Available from: <>. [15 April 2014].

Petronis A 2010, ‘Epigenetics as a unifying principle in the aetiology of complex traits and diseases’, Nature, 465:721-727.  Available from: <>. [16 April 2014].

Russell S 2004, 'The Economic Burden of Illness for Households in Developing Countries: A Review of Studies Focusing on Malaria, Tuberculosis and Human Immunodeficiency Virus/Acquired Immunodeficiency Syndrome',  The American Journal of Tropical Medicine and Hygiene, vol. 71, supply 2, pp. 147-155.  Available at <>. [15 April 2014].

UNFPA n.d., Caregiving: Women and HIV/AIDS: Confronting the Crisis.  Available from: <>. [16 April 2014].

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