The Effect of Increasing Human Capital Investment on Economic Growth and Poverty: A Simulation Exercise

We examine the dynamic responses of income and poverty to increased investment in the human capital of new cohorts of workers, using a quantitative macroeconomic model with realistic demography. Higher investment leads to significant improvements, although phase-in takes considerable time. Gains are largest in poor countries. We argue in the context of our model that investing in people is more cost effective than investing in physical capital as a means to achieve specified income or poverty goals. We also study the effect of higher human capital on fertility and the follow-on effects of lower fertility on income.