Market Failures in Health and Education Investment for the Young , Mexico 2000

Mincerian econometric estimates including health (indicated by stature), schooling and experience show adult human capital has increasing returns in Mexico. These may result from recent pro-market reforms. In addition, probit estimates show that childhood nutrition and health (also indicated by stature), as well as parental education, have substantial and possibly increasing returns in the acquisition of education, as measured by school permanence. Thus the poor are less able to invest in human capital, and constituent elements for a low human capital trap, or for a prolonged transition in intergenerational human capital accumulation, are present in Mexico, affecting 90% of the population. Further, a transition matrix analysis supports the presence of a barrier to education at 9 years of schooling. A numerical policy experiment shows that a 5 cm average increase in stature (which South Korea achieved in one generation) would overcome this barrier and lead to higher levels of education. Thus, to produce effective results pro-market reforms raising returns to human capital must be accompanied with policies supporting nutrition, health and early child development, as well as education, so as to overcome market failures in human capital investment. Policies for long-term growth must address the intergenerational dynamics of human capital accumulation.