Page 527 - The Principle of Economics

world’s advanced countries, such as the United States, and uses these resources to make loans to less developed countries so that they can invest in roads, sewer sys- tems, schools, and other types of capital. It also offers the countries advice about how the funds might best be used. The World Bank, together with its sister orga- nization, the International Monetary Fund, was set up after World War II. One les- son from the war was that economic distress often leads to political turmoil, international tensions, and military conflict. Thus, every country has an interest in promoting economic prosperity around the world. The World Bank and the Inter- national Monetary Fund are aimed at achieving that common goal.
EDUCATION
Education—investment in human capital—is at least as important as investment in physical capital for a country’s long-run economic success. In the United States, each year of schooling raises a person’s wage on average by about 10 percent. In less developed countries, where human capital is especially scarce, the gap between the wages of educated and uneducated workers is even larger. Thus, one way in which government policy can enhance the standard of living is to provide good schools and to encourage the population to take advantage of them.
Investment in human capital, like investment in physical capital, has an opportunity cost. When students are in school, they forgo the wages they could have earned. In less developed countries, children often drop out of school at an early age, even though the benefit of additional schooling is very high, simply because their labor is needed to help support the family.
Some economists have argued that human capital is particularly important for economic growth because human capital conveys positive externalities. An exter- nality is the effect of one person’s actions on the well-being of a bystander. An edu- cated person, for instance, might generate new ideas about how best to produce goods and services. If these ideas enter society’s pool of knowledge, so everyone can use them, then the ideas are an external benefit of education. In this case, the return to schooling for society is even greater than the return for the individual. This argument would justify the large subsidies to human-capital investment that we observe in the form of public education.
One problem facing some poor countries is the brain drain—the emigration of many of the most highly educated workers to rich countries, where these workers can enjoy a higher standard of living. If human capital does have positive exter- nalities, then this brain drain makes those people left behind poorer than they oth- erwise would be. This problem offers policymakers a dilemma. On the one hand, the United States and other rich countries have the best systems of higher educa- tion, and it would seem natural for poor countries to send their best students abroad to earn higher degrees. On the other hand, those students who have spent time abroad may choose not to return home, and this brain drain will reduce the poor nation’s stock of human capital even further.
PROPERTY RIGHTS AND POLITICAL STABILITY
Another way in which policymakers can foster economic growth is by protecting property rights and promoting political stability. As we first noted when we
CHAPTER 24 PRODUCTION AND GROWTH 541