Rates of Return: The Effects of Human Capital on Economic Development

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References: Human Capital and Economic Development - By African Development Bank

By what criterion should an investment policy be judged? One important criterion is the rate of return
on investment. What is meant by the rate of return on the investment and why is such a figure important?
The rate of return on investment is comparable to the interest rate which must be paid on a loan.
Formally it is the rate of interest which ensures that the present value of the net benefits of an investment
are zero. Usually the more profitable is the investment, the more a given dollar raises future income, the
higher is the rate of return.5 If there is 1 dollar to invest it makes sense to invest it in the activity which
generates most income. Rates of return calculations simply tell us where the money goes furthest. Put
that way it may sound rather obvious that we should look at rates of return. It one sense it is, but the
problems arise because measuring rates of return is difficult.
Difficulties arise, firstly, because rates of return calculations inevitably involve assessments about
the future which is uncertain. Secondly, private and social rates of return may differ. From the point of
view of society as a whole it is the social rate of return which matters and that is particularly hard to
measure. Arguments which see the key to growth in investment in human capital are essentially arguing
that social rates of return on such investment are high. In particular they are arguing that such social returns are higher than private ones and that private markets are likely to invest too little in education.

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The African Development Bank is the premier financial development institution of Africa, dedicated to combating poverty and improving the lives of people of the continent and engaged in the task of mobilizing resources towards the economic and social progress of its Regional Member Countries.The Bank’s s mission is to promote economic and social development through loans, equity investments, and technical assistance. The ADB is a multilateral development bank whose shareholders include 53 African countries and 24 non-African countries from the Americas, Asia, and Europe. It was established in 1964, with its headquarters in Abidjan, Côte d’Ivoire, and officially began operations in 1967.
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