Health, Education and Development

Why are some poor countries able to take off while others are stuck in the poverty trap? Motivated by the observation that with similar or higher levels of educational attainment, trapped countries tend to have poorer health conditions compared to the initially poor later take-off countries, we argue that health and education interact with each other to determine the productivity of labor and the development pattern of a country. To capture this idea, we develop an overlapping-generations model with human capital separable in health and knowledge. Health investment not only determines the quality of life for the agent, but also serves as an important input to constitute the health capital of a country. The health capital and the knowledge capital then together form the human capital and determine the labor productivity. We calibrate the model to fit the U.S. economy, discuss the circumstances in which the poverty trap is more likely to emerge, and provide fiscal policy to keep countries away from poverty. To understand the factors distinguishing middle-income-low countries and trapped countries, we calibrate our model to fit a group of middle-income-low countries and trapped countries. We will examine the causes of poverty of each country, that is, whether poverty is caused by deficiency in health or education investment, or intrinsic factors specific to the country. We will also discuss the forces leading the middle-income-countries to take off. Finally, we will investigate whether a trapped country could be dragged out of poverty if its government subsidizes health and education investment.