Economics of Education Review, Vol. 8, No. 3, pp. 219-223.1989. 0272-7757189 $3.00 + 0.

00
Printed in Great Britain. Pergamon Press plc

Investing in People:
Schooling in Low Income Countries

THEODORE W. SCHULTZ

Department of Economics, The University of Chicago. 1126 East 59th Street, Chicago, IL 60637.
U.S.A.

Abstract - The author, winner of the Nobel Prize in economics for his pioneering research in the
economics of education and human resources, surveys research on the role of schooling and human
capital in fostering productivity and economic growth. The author argues that the returns to human
capital are extremely large - certainly larger than the returns to most types of physical capital. He
argues in favor of increased grants by international donors for investment in primary schooling in less-
developed countries, and that innovations in institutional requirements for investment in schooling
. should-receive high priority. - The Editor.

I BEGIN with human capital. Is human knowledge issues succinctly, “‘Human knowledge’ is just
human capital? Is the ability to deal with changes in human, not Japanese or Chinese or Korean . .
economic conditions a form of human capital? How when we talk in this way about differences in
specialized is human capital? Are there increasing ‘technology’ across countries we are not talking
returns from human capital specialization? I shall about the knowledge of particular people, . . . [for
feature recent studies that deal with aspects of this] we want a formalism that leads us to think
increasing returns and with the economic import- about individual decisions to acquire knowledge and
ance of human capital in the modernization process about the consequences of these decisions for
of low income countries. productivity. The body of theory that does this is
I shall then consider schooling as one of the major called the theory of ‘human capital’.“*
forms of specialized human capital. What we know empirically about human capital is
based predominantly on micro studies. The pro-
HUMAN CAPITAL ISSUES duction and income effects of human capital on the
decisions and actions of individuals are being
Human capital is a new area of economics based measured and explained. We have learned that
upon theoretical and empirical work of the last two economic measurements of the macro dimensions
and a half decades. Prior to that, economists were on human capital are hard to come by.
spared such analytical niceties. There is no human Much of what we have learned about human
capital in Das Kapituf. Although Irving Fisher’s all- capital can be stated briefly as propositions.
inclusive concept of capital was not accepted during 1. The human capital that people in developed,
his time by the mainstream of economists, it has modern economies have accumulated consists pre-
long been clear to me that human capital is an dominantly of specialized human capital.
integral part of Fisher’s concept. I urge you not to 2. A Crusoe or a self-sufficient farm family or a
confuse manpower or human resources with human small population on a small island with no trade with
capital. ’ people at any other location, has little or no
In explaining economic growth, economists have incentive to acquire specialized human capital.
underrated various dimensions of human capital. 3. During the process of economic modernization
On the meaning of technology in relation to that of the rate of increase in human capital is higher than
stock of useful knowledge, Robert Lucas has put the that of reproducible physical capital.

[Manuscript received 17 January 1989; accepted for publication 13 February 1989. ]

219
220 Economics of Education Review

4. Human capital enhances the productivity of Griliches. In retrospect it was bold and simplistic of
both labor and physical capital. me to have published estimates of stocks of repro-
5. People at each skill level are more productive ducible tangible capital, of educational capital in the
in a high human capital environment than in one labor force, and of on-the-job training capital, for
that is low in human capital. 1929 and 1957, in the United States.* But needless
6. Two-way international trade in similar pro- to say, I was conditioned to favor the Jorgenson-
ducts between similar countries occurs as a con- Griliches approach over that of Denison.
sequence of increasing returns to scale made poss- For me it took a lot of on-the-job experience to
ible by human capital specialization. learn that the simplifying assumption that capital is
7. Adam Smith’s famous proposition that the homogeneous is a disaster for capital theory, and
division of labor depends on the extent of the that the assumption that the heterogeneity of
market, encompasses the advantages of specializ- various forms of capital as economic conditions
ation including specialized human capital.’ change can be transformed into a homogeneous
When it comes to economic measurements, early stock of capital, is untenable.
economists were not inundated with statistics. They I came to see more in Denison’s approach. His
were spared the burden of statistical proof. They “output per unit of input results” seem strong in
relied on direct observations. Now we place our view of his accounting of the factor inputs. Among
trust in hard data provided they are sanctioned by his 12 explanations for the changes in the measured
theory. Less thinking is required. output per unit of input, there are several that open
1. During the 195Os, competent economic studies the analytical door a good bit to get at the origins of
mostly by economists associated with the National the returns from specialized human capital.
Bureau of Economic Research devoted to measure- What human capital contributes to economic
ment, reported unexplained changes in total factor growth depends in large measure on the process of
productivity which became known as The Residual specialization. But we have a myopic view of
and as The Measure of Our Ignorance. To dispel1 specialization. We do not see the extent to which
this state of ignorance some economists were sure specialization increases over time. For industry we
that the basic facts were in error. Others relabeled know about Adam Smith’s pin factory. For agricul-
“
. . these changes as Technical Progress or Ad- ture we blithely assume that there is nothing
vance in Knowledge . .” and thus, left the problem comparable to a pin factory. In international trade,
of explaining growth in total output unsolved.’ however, specialization has long been a part of trade
In retrospect it is instructive to recall the search theory and its applications. In a recent study, Daniel
for explanations and the ideas that were advanced Gros shows that two-way trade in similar products
for the increases in measured output that exceed the between similar countries is explained by increasing
increases in measured inputs. returns to scale that are made possible by specific
2. Studies by Denison and those by Jorgenson- human capital specialization.’
Griliches loomed large in the search for ex- It is part of the folklore in economics to believe
planations. They also clarified and improved the that agriculture is immune to specialization that
basic data. They disagreed head-on in a series of requires specific human capital. In fact, however,
polemic publications which dealt with their differ- today’s farmer is no Crusoe; self-sufficient is not his
ences on measurements and on explanations. As economic state. The case of the specialized corn belt
economic literature, these papers are major contri- farmer is instructive. He no longer maintains a few
butions.” According to Denison, a substantial part chickens for eggs and broilers, a few cows for milk
of the post-war growth in national output was due to and butter, or a large garden for vegetables and
an increase in productivity; according to Jorgenson fruit. Such food items are purchased. So is the
and Griliches, almost all of the increase was due to electricity, gas for fuel, telephone service, water not
an increase in factor inputs6 infrequently piped in from off farm sources and paid
In my early efforts to make room in economics for for. He no longer produces his own seed corn. He
human capital I took advantage of Fisher’s all- buys hybrid seed appropriate to his area. His corn
inclusive concept of capital. My approach in making production expenses to a large extent consist of
my first estimates of “Capital Formation by Edu- inputs produced by industry. In the production of
cation”,’ is closely akin to that of Jorgenson- pigs some farmers specialize in producing breeding
 Investing in People: Schooling in Low Income Countries 221

stock, others in farrowing and maintaining the ity under conditions of agricultural modernization. ‘*
piglets through weaning. Still others produce feeder D.P. Chaudhri was among the pioneers in showing
pigs, and lastly are the farmers who finish their that in fact the schooling of farmers contributed to
growth to suit the market. The production and their success in modernizing agriculture.13
utilization of draft animals in India has long been Finis Welch succeeded in separating the work
specialized by regions. Yet the myth persists that effect from the allocative effect of education.14 The
farmers are jack-of-all-manner of production activi- favorable returns to the schooling and higher
ties and masters of none. education of farmers are in large measure the result
It should be obvious that specialization abounds of the allocative effects of education. This acquired
in our cities and factories, commerce, manufactur- allocative ability is in fact a specialized form of
ing and in both light and heavy industries. human capital.
Since economists are not adverse in being thought
of as one of the knowledge producing professions, I Incentives to Utilize Human Capital
turn to the production and distribution of knowl- Rosen came to grips with this basic issue in his
edge in the United States based on the authority of “Specialization and Human Capital.“” His argu-
Fritz Machlup. His 1962 book”’ is a rich vein of ment follows:
information on the vast network of specialization “Incentives for specialization, trade, and the pro-
that prevails. The extent and complexity of the duction of comparative advantage through invest-
ment are shown to arise from increasing returns to
knowledge producing professions bespeak specializ-
utilization of human capital. Indivisibilities imply
ation and, in good measure, it accounts for much of fixed-cost elements of investment that are indepen-
the productivity of the professions. dent of subsequent utilization. Hence, the rate of
An important distinctive feature of our economic return is increasing in utilization and is maximized by
system is the growth in human capital. It is true that utilizing specialized skills as intensively as possible.
Identically endowed individuals have incentives to
without it there would be for most people only hard
specialize their investments in skills and trade with
physical work and low income except for those who each other for this reason, even if production technol-
have income from property. Recall Faulkner’s early ogy exhibits constant returns to scale.
morning scene of a poor, solitary cultivator at work The enormous productivity and complexity of
modern economies are in good measure attributable
in a field. “The man without skills and knowledge
to specialization.”
leaning terrifically against nothing.”
Wherever we turn in investigating the increases in Gras’s Contribution”
the earnings from work over time, we find that It is of two parts. The first, already referred to,
specialization, human capital and productivity go explains two-way international trade in similar
hand-in-hand. products between similar countries by increasing
Specialized human capital is an important source returns to scale that are made possible by specialized
of increasing returns as is evident from recent human capital. The second, which does not depend
studies. on international trade, implies that there should be a
positive relationship between firm size and invest-
In Marriage ment in human capital per worker. It also implies
The human capital approach features the in- that larger firms should have a work-force with
centive to invest in specific human capital. Becker’s relatively more highly task-specific human capital.
recent study shows that, “Increasing returns from These implications are supported by the data that he
specialized human capital is a powerful force creat- presents.
ing a division of labor in the allocation of time and
investments in human capital between married men Lucas’ Approach”
and women”. l1 He assigns a central role to his concept of the
external effects of human capital. These effects spill
In Agriculture over from one person to another, people at each
As noted, specialization abounds. Scale effects on skill level are more productive in high human capital
returns are well-known. The comprehensive treatise environments, and human capital enhances the
by Dean Jamison and Lawrence Lau shows that the productivity of both labor and physical capital.
education of farmers enhances their allocative abil- Lucas thinks of “human capital accumulation as a
222 Economics of Education Review

social activity, involving groups of people, in a way My reasons for attributing great economic import-
that has no counterpart in the accumulation of ance to schooling in low income countries are as
physical capital.” follows. (1) The acquired abilities to read efficiently
Studies of the interdependence between specializ- and to write with competence are essential in
ation, human capital and growth are on the research achieving modern economic growth and they are in
agenda of an increasing number of economists. Our general necessary prerequisites to investing in ad-
myopic view of specialization is being corrected by ditional specialized human capital on through secon-
appropriate lenses. Investigations show that special- dary schools and on and on, be it to become highly
ization, specialized human capital, increasing re- competent specialized scholars or scientists. For a
turns and economic growth go hand in hand. refreshingly useful historical perspective on literacy
in this context, we now have Jeffrey Brooks’ When
Schooling as Human Capital Russia Learned to Read.18 (2) These valuable
abilities are in large measure acquired during the
The research staff of the World Bank concerned early years of schooling. (3) The real costs of
about schooling has become a productive bee-hive. learning to read and write is at its lowest during the
Although the level of the Bank’s economic intel- early years of schooling. (3) The real cost of learning
ligence about schooling is high, the loans and credits to read and write is at its lowest during the early
provided by the Bank to augment the stock of years of primary schooling; this cost increases as the
human capital consisting of schooling has been and value of time of the maturing student rises. (4) The
continues to be negligible. It could be that the abilities to read and write are critical components
management and operational skills to provide loans of the quality of the human capital of any popu-
and credits to increase the stock of physical capital lation.
efficiently in low income countries, simply do not importantly, that not only are the rates of return to
suffice to increase the stock of human capital. investment in primary schooling in general higher
I shall return to this assessment. Before I do so, than in secondary schooling or in higher education
however, I shall deal briefly with some of the but they also tend to exceed the normal rates of
economic costs that languages entail and also with return to investments in physical capital. The allo-
the economic importance of the acquired ability to cative implications of this knowledge are clear and
read and write. cogent.
I know of no satisfactory analysis of the econ- Banks, however, are not in the business of
omics of languages. When I did my graduate work, providing funds for primary schooling. The
two foreign languages (German and French) were managers and operators of banks by training and
required for a Ph.D. in economics. Now English from experience have learned the functions of
suffices. Some would contend that now mathematics investments in physical capital. For them the con-
suffices! Since World War II, English has become cept of human capital is a fancy phrase that is
the international language of economics. Thus, in harmless when it is confined to the ivory tower. On
the U.S., this particular foreign language cost has this score the World Bank is no exception. When it
declined markedly. In Canada, meanwhile, the costs comes to providing loans, human capital is deemed
in terms of time required to learn the second to be all too intangible. Thus, loans for human
language must be very substantial. Throughout capital do not qualify no matter how high the
much of central Africa and also in other low income prospective rates of return.
areas, there are spoken languages or dialects that But for better or worse, the World Bank is not
serve small local communities; it follows that restricted to making hard loans. It has IDA, which is
relative to the costs of school instruction in such a large window for doing soft financial business. The
languages or dialects, the economic value of this terms of the “credits” provided by IDA are so soft
class of specialized human capital must be very low. that for all practical purposes they have the attrib-
There are exceptions. One such occurs where such a utes of “free funds” provided that the country
language is spoken on radio to provide information receiving IDA funds does not reckon the political
where most of the people are not literate. costs of getting them.
Would that we had a definitive treatise on the The commitments of IDA credits beginning in
economics of languages. 1961 and through 1982 (last year for which I have
 Investing in People: Schooling in Low Income Countries 223

figures), totaled $26.7 billion, which amounted to IDA credits to enhance and protect the credit
$43 billion in 1982 dollars. Less than 6% of these worthiness of vulnerable physical capital loans.
credits were allocated to education. Who knows The institutional requirements for investing in
how much of that classified as “education” was schooling in low income countries is our unfinished
allocated to primary schooling? As far as I can tell, business. It should be placed high on our respective
very little indeed was used to increase the stock of agendas. Innovations are called for. Would that we
human capital that primary schooling creates. could become as successful in innovating in this area
I have expressed my doubts time and again on of institutions as in the Rockefeller Foundation first
banking operations that blend and mix World Bank in Mexico and later jointly with the Ford Foun-
loans to finance the formation of physical capital dation in the Philippines in “inventing” the Inter-
with IDA credits. It is not a desirable institutional national Agricultural Research Centers and pro-
arrangement because it creates an incentive to use ceeding to put this invention to test.

NOTES

1. Theodore W. Schultz (1972) Human capital: policy issues and research opportunities. In Human
Resources, NBER, pp. l-84. New York, Columbia University Press.
2. Robert E. Lucas, Jr (1985) On the mechanics of economic development. Marshall Lecture,
Cambridge University, May 1985.
3. Sherwin Rosen (1983) Specialization and human capital, J. Labor Econ. 1, 43-49.
4. D.W. Jorgenson and Z. Griliches (1967) The explanation of productivity change. Rev. econ. Studies
249-283.
5. Five of the principal publications on these issues appear in U.S. Department of Commerce,
publication Survey of Current Business, The Measurement ofkoducfiviry, Part II, May 1972, Vol. 52.
No. 5, pp. l-111. It is also available as Reprint 244 of the Brookings Institution. Washington, DC.
6. U.S. Department of Commerce, Ibid., p. 1.
7. Opportunities (1972) In Human Resources. New York: National Bureau of Economic Research,
pp. l-84.
8. Theodore W. Schultz (1960) Reflections on investment in man. J. polir. Econ. 68, 571-583.
9. Daniel Gros (1984) Increasing returns and human capital in international trade. Ph.D. Dissertation,
University of Chicago.
10. Fritz Machlup (1962) The Production and Distribution of Knowledge in the United States. Princeton,
NJ: Princeton University Press, xix + 416 pages.
11. Gary S. Becker (1985) Human capital, effort, and the sexual division of labor, J. Labor Econ. 3(l),
533-558.
12. Dean T. Jamison and Lawrence J. Lau (1982) Farmer Education and Farm Efficiency. Baltimore:
The Johns Hopkins University Press, xviii + 292 pages.
13. D.P. Chaudhri, Education and agricultural uroductivitv in India. Ph.D. Dissertation. 1
Denartment
of Economics, University of New Delhi, unpublished. .
14. Finis Welch (1970) Education in Droduction. J. oolit. Econ. 78. 35-39.
15. Sherwin Rosen (1983) SpecializaGon and human capital. J. Labor Econ. l(l), 43-49.
16. Daniel Gross, already cited.
17. Robert E. Lucas, Jr (1985) On the mechanics of economic development, Marshall Lecture,
Cambridge University, May 1985. I am dependent on a draft dated March 1985.
18. Jeffrey Brooks (1985) When Russia Learned to Read: Literacy and Popular Literature, 1861-1917.
Princeton, NJ: Princeton University Press, xxii + 450 pp. See especially Chapter I on Uses of
Literacy; and Chapter II on Primary Schooling.