A cause for concern in LMICs is whether cognitive ability falls into a poverty trap framework. The consequences of an insufficiently skilled population may also be cyclical. Emerging evidence has suggested that this may be due to a lack of skills obtained through schooling, as an insufficiently skilled population is unable to produce an adaptable and innovative workforce (Hanushek and Woessmann, 2008, Krueger and Kumar, 2004). However, despite efforts to improve education in many low-and middle-income countries (LMICs), economic growth remains slow. 1 Developments in human capital models suggest that measures of cognitive ability, as a proxy for human capital, provide a better explanation for differences in economic growth, productivity, income inequality and wages than traditional measures of education (Hanushek and Woessmann, 2008, Hanushek and Woessmann, 2012). Typically in the development economics literature educational attainment such as years of schooling or performance and IQ scores or competitive tests scores are used as benchmarks for measuring cognitive ability. Cognitive ability entails the capacity to accumulate and process knowledge and applying them to problem solving. The cognitive ability of children has gained the attention of researchers and policy makers as a measure of future human capital potential. This paper examines how childrenвЂ™s cognitive ability is related to their familiesвЂ™ permanent capacity to allocate household resources.

Contrary to theoretical predictions, results from the model suggest that the relationship between consumption capacity and cognitive ability is predominantly linear. Further, the study considered non-linear specifications to determine whether the association between consumption capacity and cognitive ability diminishes at relatively higher wealth levels. This result is robust to alternative measures of cognitive ability and wealth. A modest relationship between household consumption capacity and cognitive ability is established using hierarchical fixed effects models. This paper contributes to the literature by examining the relationship between household consumption capacity and cognitive ability for children in Ethiopia, Peru, and Vietnam using longitudinal data from the Young Lives study. Recent studies have examined the role household resources have to play in fostering human capital potential from an early age. Childhood cognitive outcomes are an important indicator of future human capital potential and a predictor of economic development in low-and middle-income countries.

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