Education and Economic Well eing A Study of Interlinkages

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    Education and Economic Well being

    A study of inter linkages

    Arpita Bhattacharjee

    Economic development is a process of progressive change in the economy--changes which improve the level of living of the people. Economic development requires persistent increase in real income along with technical and

    institutional changes that register progress. Technical and institutional changes bring qualitative transformation of the whole society. And in this transformation the most important role is played by capitalboth human and


    Physical capital refers to the non-human assets such as buildings, equipments, machinery etc., that is, something which is tangible. It was believed in early years that physical capital is the most important factor for economic development. Physical capital is no doubt important for increase in the quality and quantity of production. As we acquire more sophisticated physical capital, it will certainly give us better result. In every sector of an economy we find that use of machinery or modern equipments increases production capacity. Use of physical capital helps to produce huge amount of product at a short time. Economic development is closely related with the volume of physical capital. If we use tractors in place of plough it will certainly help us to save labour and time in agricultural field and produce more goods. Same way in the industrial sector also we find that computer and other modern technology help us to do things more quickly and efficiently. Development and use of sophisticated physical capital save resources which can be used for other alternative production purposes.

    However, growth of physical capital alone is not sufficient for economic development of a nation. Utilizing these resources effectively is more important for the rise in productivity and capital value. However, it is the human resource which plays the most crucial role and without which it is not possible to innovate, use and upgrade physical capital for economic development. Human capital is capable of transforming all other factors for the betterment of human life. The higher the quality of human resources, the faster is the economic development of a nation. The quality of the human resources is determined by the quality of education and health of the people of a country.

    Human capital refers to the stock of productive skills and technical knowledge embodied in labour. It is substitutable but not transferable. Human capital is the education, skill and experience that people bring to the workplace. Human capital is that part of human resource which has technical knowledge and capable for further production.


    Human Development Report (HDR: 1996) prescribes three indicators for measuring human development. These are: longevity as measured by life expectancy at birth; educational attainment as measured by adult literacy and combined primary, secondary, and tertiary enrollment ratio and standard of living as measured by real GDP per capita. Among all these indicators the most important one is education. Education can accelerate the rate of progressive change of the economy. It helps to generate human capital for accelerating economic development of a nation. Importance of education in economic development has been realized from time immemorial. It is the factor which can influence both the other two indicators of HDI. Education makes people more conscious about their health and hygiene which, in turn, affects the life expectancy. It also influences the income variable as skilled and trained persons are more productive and hence earn higher income. Education helps to develop individual capability in different ways as it has both intrinsic and instrumental values. Education, even if not used in production directly, has its own value. Educated individual can participate in social and economic life in a more effective way. An educated person can understand matters properly and take appropriate decisions. Instrumental value of education is important for economic material wellbeing of the person. Education imparts skill which is instrumental in raising labour productivity and hence level of production in an economy.

    It is worthy to note Marshall’s (1961) view on the role of education in economic development

    a good education confers great indirect benefits even on the ordinary workman. It stimulates his

    mental activity, it fosters in him a habit of worse inquisitiveness; it makes him more intelligent,

    more ready, more trustworthy in his ordinary work; it raises the tone of his life in working hours

    and out of working hours it is thus an important means towards production of material wealth.

    Thus, education, with all its effects, is the source of formation of human capital. And human capital may be viewed as the result of learning. A good and efficient education system yields positive returns to the individual by the way of higher wages and to the society by the way of greater productivity. Knowledge increases the power of reasoning and ability to analyze facts which help to develop modern ideas essential to bring desired changes for economic development of a nation.

    Johnson (1964) noticed that economic development depends on creation of skilled and technical labour force those who are ready to accept economic and technical changes. To him education is an investment and increased investment in education will accelerate economic growth.

    Education helps to develop individual capability in different ways as it has both intrinsic and instrumental value. For economic well-being, it is essential that human capital should be developed in such a way so that when it acts upon the material capital, sustained increase in stock of capital in use should take place. It is only possible by providing adequate and relevant skills to the workers. For economic well being, education system should be such that it helps workers in changing or reorienting their attitudes and outlook towards life, work and methods of doing things. It should help them to prove themselves as most important productive factor in the economy.


    With the arrival of the age of knowledge economy, the most important driver of economic development is the availability of skilled labour. Skill formation requires investment in relevant education. The higher the level of education of the people, the better equipped they are to absorb new information, acquire new skill and familiarize themselves with technologies. The rate of scientific innovation appears to be positively correlated with the level and quality of education in a society. Besides economic gains, education, with all its affects on individuals, also benefits society. Education enables people to be better mother, better father, responsible children, informed voter and concerned citizens. Education also creates positive externalities as the educated person understands his neighbours better and others also find it easier to communicate with him. Education of parents gets transferred to the children or helps the children in innumerable ways and act as the motivating factor for them in their academic Multiple effects of education can be better understood form Figure 1.

    Figure: 1 Multiple Effects of Individual Education

     Literacy Access to information

    Broader perspective

     Skill nonmarket efficiency

    Market opportunity

    Individual education

     Certificates non market efficiency


     Socialization attitudes

     Behavior pattern

    Source: Psacharopoulos and Maureen (1991)

    The expansion of education is not only an important precondition for economic development but also plays a critical facilitative role in the transition of socio economic condition of a country.

    Interlinkages between education and economic development

    A large number of studies have already supported the view that education and economic development are inter related. There is a two way linkages between education and economic well being. Education contributes to economic development and economic development in turn contributes to human well being by enlarging available


    opportunities for them. Economic growth leads to the reorganization of existing production structure which in turn creates the demand for various skills. These skills are obtained via formal and informal institutional training and education. It is not exactly possible to assert which is the cause and which is the effect. Both are causes and both are effects (Tilak: 1994).

    In general, economic development means increase in per capita income but it can not be separated from other indicators of human development. Stevens and Weale (2003) observe that education is needed for people to benefit from scientific advances as well as to contribute to it. Education has an impact on every sphere of life. It improves the living standard of the people by increasing income which helps them to be more conscious about their own and family health. Healthy and wealthy people are more productive. The two-way relationship between education and economy is depicted in Figure 2. Psacharopoulos and Maureen (1991) show how links and relationship among different factors enhance productivity of investment in education.

    Figure:2 Relationship among Education, Income, Nutrition, Health and Fertitlity

    ; Land ownership and tenure ; Technology and research ; Domestic saving ; External capital ; Investment allocation ; Agriculture ; External trade ; Taxation and transfers


     Nutrition Health

     Food production Subsidies and rations Food fortification

    Fertility Education ; public health care ; water supply sanitation and housing

    ; family planning ; public education ; incentives

    Source: Psacharopoulos and Maureen (1991)

    Education not only gives better return in the form of higher income but also influences other essential aspects of life. Education helps to create consciousness about the health and nutrition which are most important for


    productivity growth of labour force. With increased income and better health people are more interested to learn new technique and to innovate new ideas for further improvement. As a result, demand for education further rises boosting educational development. The role of education, thus, can be understood from three separate but interrelated perspectives: (a)education as a basic human need in itself; (b)education as a means of meeting other basic needs; and (c)education as an activity that sustains and accelerates overall development (Tilak:1994) How education effects development of the base of an economy can be understood form Table 1 where requirements of different levels of education for different levels of technology used to raise productivity of farmers on agricultural field are presented. Realization of the value of education in every level of farming leads to the increase in the demand for education even in the primary sector.

    Table: 1 Four Basic Stages of Agricultural Productivity and Their Learning Requirements Farmer-entrepreneurs’ technology Agricultural inputs Minimum learning requirements


    Level A: Traditional farming techniques Local varieties of seeds Addition and subtraction--not necessarily

    Passed from parent to child and implements acquired through formal education

    Level B: Small quantities of Addition, subtraction, division and

    Intermediate technology fertilizer rudimentary literacy

     Level C: High yielding varieties; Multiplication, long division, and other

    Fully improved technology proven seeds; rate of more complex mathematical procedures;

    application of seed, reading and writing abilities, and

    fertilizer, and pest rudimentary knowledge of chemistry and

    control per acre biology

    Level D: All above inputs; tube Mathematics, independent written

    Full irrigation based learning well access during the communication, high reading

    offseason; and water comprehension, ability to research

    rates per acre unfamiliar words and concepts;

    elementary chemistry, biology, physics;

    and regular access to information from

    print and electronic sources

     Source: Psacharapoulos and Woodhall (1991)


    Education is one of the activities that deserve to be accorded high priority as it has a lot of spill-over effects in meeting other basic needs. Basic education increases productivity and longevity as well as reduces fertility which is required for the development of a society. The m mechanism as to how education works to affect these crucial variables is shown in Figure 3.

    Figure: 3 Mechanism through which Education Effects Productivity, Longevity and Fertility

     For society: raises ability to provide more services

    For individual: Raises consumption

    Food and Nutrition

    Productivity Leads to more integrated or sect oral (increases) developmental activities Water and

    Sanitation Fertility (reduces)

     Basic Education Health Longevity (improves)


For individuals: Influences learning ability and stimulates desire for increased knowledge

    For society: Raises demand for complex skills necessary beyond individual needs

    Source: Tilak (1994)


     Human capital is the most important agent of economic development and now it is realized that improvement in the quality of labour force can have dramatic effect s on the economic development. Human capital contributes to labour productivity. Education is necessary for development of both farm and non farm practices. It is necessary for family maintenance and for proper management of time and resources for improvement in the social conditions. The importance of investment in education has been emphasized for long (Schultz: 1981) . This has been dawned on the nations with sharper focus following the onset of globalization. As comparative advantages of the nations are giving way to competitive advantages with the transformation of the global economy from manufacturing to knowledge creation, education is destined to play a much grater role in economic development. A nation can ignore investment in education only at its own peril.



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    Jonhnson, H.G. (1964), Towards a generalized capital accumulation approach to economic development, “in

    Economics of Education, edited by Mark Blaug (1971), Penguin Books Ltd. England. Marshall, A. (1961). Principles of Economics (9th Ed. Variorum, 2 vols.), with annotations by C. W. Guillebaud.

    London: MacMillan.

    Psacharopoulos, George and Mauren Woodhall, ,(1991), Education For Development An Analysis For Investment ChoicesA World Bank Publication, Oxford University Press Schultz,W.T.,1981,Investing In People The Economics Of Population Quality, Hindustan Publishing Corporation(India)Delhi

     Schultz, W.T (1981), Investing In People The Economics Of Population Quality, Hindustan Publishing Corporation (India), Delhi Stevens, Philip and Weale, Martin,(2003), “Education and Economic Growth”, National Institute of Economic and Social Research,2, Dean Trench Street, London SW1P 3HE

    Tilak, B G Jandhyala, (1994), Education for Development in Asia, Sage Publication, New Delhi

    Tilak, B G Jandhyala, (2003),Education Society and Development National And International perspectives ,edited by J

    B G Tilak APH Publishing Houses, NIEPA

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