Investing in Health Author: Guillem López Casasnovas, Professor of Economics and Director of the Center of Research in Economics and Health at Pompeu Fabra University, Barcelona, Spain.
The evolution of economic growth theory has become inextricably linked to the evolution of economics itself, at least in as far as this provides an explanation for the wealth of nations. In the neoclassical model technological progress is exogenous and long term economic growth is directly related to diminishing returns to capital. This has limited quite strongly the analytical capacity of the model and its empirical verification.However, the constant increase in the differences between rich and poor economies stimulated economists to look at new theories that might explain this dynamic. As a direct result, a new family of theories emerged that were better capable of explaining long-term growth (Barro and Sala-i-Martin, 1995). From Neoclassical Economics to The Human Capital Theory From the early 90’s various studies have attempted to identify the determinants of economic growth. Many variables have been tested, but only a few have been accepted as being economically and statistically significant in explaining growth. Theorists generally accept human capital to be one of these variables. The role of human capital is almost universally regarded as being indispensable to the engine of economic growth. Sustained growth depends on levels of human capital whose stocks increase as a result of better education, higher levels of health and new learning and training procedures. Without a labor force with the minimum levels of education and health, a country would not be capable of maintaining a state of continuous growth. The effects of human capital variables imply that the investment rate tends to increase as the levels of education and health rise. Both these variables evolve systematically according to levels of development, and these changes may be linked to increases in the investment rate. A more highly educated, healthier workforce finds it easier to create, use, and adapt new technologies. Poor countries have lower levels of human capital and therefore have greater difficulties in competing with those that are more highly developed. In order to foment growth in poorer economies their levels of human capital must begin to converge with those of richer nations. Right up until the second half of the 1990s the role of human capital was, in the main, linked to education, although a few authors recognized the importance of other factors such as health and nutrition in examining the relationship between economic growth and health, wealth and health. Good health is a crucial component of well-being (Kahneman, 2003). However, improvements in health status may be justified on purely economic grounds. It seems to be a logical assumption that good health raises human capital levels and therefore the economic productivity of individuals and a country’s economic growth rate. Better health increases workforce productivity by reducing incapacity, debility, and the number of days lost to sick leave, and reduces the opportunities an individual has of obtaining better paid work. Further, good health helps to forge improved levels of education by increasing levels of schooling and scholastic performance (Grossman, 2000). There is also an important knock-on effect in that the resources that would otherwise be used for preventative health treatments are freed for alternative uses or in cushioning the effects of other negative externalities such as poverty within the community. Understanding Links To gain a more adequate understanding of the accumulation process driving health human capital and wealth it is essential to know how the causal relationship between the two works. The main difficulty in any approach to this task lies in the possible existence of endogeneity between health and wealth. While good health may be considered as a form of human capital that has a beneficial effect on productivity, income also influences health in a positive way. The capacity to generate higher earnings facilitates an increase in the consumption of health related goods such as adequate alimentation or medicines. There is also an indirect effect on health via the improvements inherent in changes in life style, a more intensive participation in the work place, higher levels of education for the individual, all of which promote higher health levels through increases in income. The nature of this feedback creates a number of problems when it comes to carrying out estimations for the impact that health has on economic growth. Over the last few years a variety of theoretical and empirical research has given rise to a large body of literature that provides evidence supporting the thesis that health exerts a positive effect on wealth. In analytical terms several infinite-horizon and finite-horizon models have been developed, which attempt to analyze the accumulation process of health and economic growth. In the basic setup the household-producer does not decide on the amounts of money the household saves or invests in human or physical capital. In the models in which individuals attempt to maximize their utility on the other hand, investment in human capital may have a direct impact on the individuals carrying out that investment or they may decide to act more altruistically by investing in the human capital of their children. These lines of research have led to models that, by considering the specific characteristics of consumption and production of the economy, are capable of assessing the direct and indirect influence that individual health and education investment decisions have on present and future generations. The positive effect of health on economic growth is identified either in exogenous growth models during the transition to the steady-state or in endogenous growth models, within the context of intertemporal optimization. In the empirical discussion, macro and micro studies analyze whether different health indicators are positively linked to different dimensions of economic growth. On a macroeconomic level, both within-country and cross-country analyses measure the effects of different inputs on total economic output. These inputs include human capital which is given jointly as a combination of health and education. These studies come up against specification problems that arise by attempting to simultaneously analyze health and education due to the aggregate effects of health or to reverse causation. On a microeconomic level, many studies have analyzed the impact of health on wages. Different health indicators are used and range from anthropometric measures such as weight, height, the body mass index, and measures based on surveys that report factors such as self assessed health status, whether the individual is suffering from a particular chronic illness, or whether their main activity is impaired or limited. These studies are based on the idea that healthier workers are less susceptible to disease, more alert, and more energetic and are consequently more productive and command higher earnings. The main problems in these kinds of studies are normally derived from measurement errors when it comes to capturing the individual’s health status, the heterogeneity of the variables and the possible feedback among them. The Concerns of the International Organisations In addition to individual research some international organizations have set in motion their own initiatives to verify and measure the extent of the relationship between health and the accumulation of wealth. The Commission on Macroeconomics and Health spent two years analyzing the impact of health on development in an attempt to examine the channels through which health related investments might have a positive impact on economic growth and equity in developing countries. Two other important research projects were directed by the Pan American Health Organization and the Inter-American Development Bank. Both focused on Latin America and the Caribbean. The former dealt with the impact of health on long-term economic growth and the latter on the impact of health on household productivity. The Pan American Health Organization is currently carrying out Phase II of its Health and Economic Growth project. This undertaking looks at the relationship between the persistence of poverty and inequalities and human capital accumulation, and variations in economic growth and social development. These initiatives, besides generating an enormous amount of good quality research, have served to fill a void in existing literature. In addition the literature on Health Economics and economic growth has shown the importance of the improvements of health in populations to reduce poverty and inequality in less developed (LDC) countries. In fact, once we account for the increase in life expectancy, at least partly ‘free imported’ from the more developed world a new picture emerges: inequality among rich and poor world have been much larger in absence of the improvement in health and the reduction of the burden of disease has been highly significant. A recent World Health Report 2003, recently published, has come to emphasize the magnitude of the work to be done: The gap in life expectancies between rich and poor countries is widening. A baby born today in Japan can expect to live for 82 years, with 92% of that time in good health. In Sierra Leone, however, average life expectancy at birth is mere 34 years, more than five of those years (a 16%) spent in ill health. Similarly in Angola and Afghanistan. In Russia, closer to the West is 59 years, 61 in Turkey. While AIDS is the main killer in Africa, heart disease and other non-communicable conditions are having the effect elsewhere. International assistance is advocated in poor places without delay. Indeed, for LDC to invest in health means often to escape from the poverty trap. Public health and epidemiological programs help indeed to move the current ‘state of affairs’ of LDC, in creating complementarities on other forms of human capital, as education or sustainable fertility rates for families. Indeed, it is today well documented how increases in life expectancy affects parents decisions to invest in their children’s education, by lowering the expected losses from infant mortality. As a result, women may reduce birth rates since not so much need of replacement of family labour force is required. All this by itself increases per capita income. In addition, more educated and healthy population increases productivity, with income to be shared amongst less impoverished people. Investing in health may shift in this sense, the production possibility frontier of a society. Wealth creation which was considered not to be possible before, may then be. New products may start to be valued for consumption, once survival is assured and per capita income increased. Under preferences for higher income elasticity goods, quality aspects of life reach the citizens’ consumption baskets. So when people age, as a proof of the general health improvement of the population. In the developing world (Hirway, 2002), investing in health means also higher labour productivity. Even under decreasing marginal returns, fighting obesity, alcohol abuse, smoking, drug addiction and lag of exercise improves the industrial output, lowering absenteeism and reducing human capital losses (and social investment opportunities) for the economy. No need to say the importance of saving pain and suffering to society, allowing for health expenses on chronic conditions to be devoted to some other aspects of community welfare. When building a global strategy to invest in health, either by devoting international aid to LDC or by increasing money from consumers and taxpayers on health finance, targeting should not be the exception but the norm. Indeed, aid needs to focus on selective population groups, such as family members responsible of the group (women, income earners, with young parents with dependants) as the World Bank does when allocate priorities according to the global burden of disease. Less accessible isolated areas need to be prioritized too. Public Health and Primary Care, together with basic education and health prevention should be paramount. They may not save deaths at the case-by-case level, but their externalities and indirect benefits make for an always worthy investment. Public resources need to be first concentrated to insure against the catastrophic consequences of illness, just the opposite of more of our NHS public systems, which are rather good on full coverage from minor acute health problems, and much less on chronic conditions and mental health (at least in Spain!). Public solidarity funds should at the margin benefit more to more deserved-needed population. This goes badly with the idea of universalism and free access in health care, at least when this is understood as ‘free bar’ for services. The Barcelona iHEA Conference Investing in health cannot be identified, as we have commented here, with higher health care (public) expenditure. Investing in health is much more than to spend on health care. It needs a fully comprehensive strategy, a well-adapted tactic to address health population targets and a more complete agenda to close the gap between efficacy in the laboratory of ideas and effectiveness, in the real world. Investing in Health is the 2005 IHEA Conference topic to be held in Barcelona from July 10th to 13th, at Pompeu and Forum de les Cultures. Guillem López Casasnovas, director of CRES, The Center for Research on Health and Economics at the UPF is the local organizer. He is the coeditor of Health and Economic Growth, MIT Press, 2005, with L. Currais and B. Rivera. Most of the content of this viewpoint is abstracted from Chapter 1 of the mentioned book. Main speakers of the Conference include Daniel Kahneman (invited session), Mike Grossman, Xavier Sala-i-Martin and Indira Hirway, among others. References Barro, R., and X. Sala-i-Martín.1995. Economic Growth: McGraw Hill. Fogel, R. W. 1994. Economic Growth, Population Theory and Physiology: The Bearing of Long-Term Process on the Making of Economic Policy. American Economic Review 84 (3): 369-95. Grossman M. (2000)“The Human Capital Model.” In Handbook of Health Economics, Volume 1A, edited by Anthony J. Culyer and Joseph P. Newhouse. Amsterdam: North-Holland, Elsevier Science, pp. 347-408 Hirway I et.al. (ed.) (2002)Dynamics of Development in Gujarat, New Delhi, Concept Pub., xvi, 468 p. Kahneman, D. (2003) A psychological perspective on economics. American Economic Review (Proceedings), 93:2, 162-168. Mankiw, G., D. Romer, and D. Weil. 1992. A Contribution to the Empirics of Economic Growth. Quarterly Journal of Economics 107 (2): 407-37. Pan American Health Organization. 2001. Investing in Health. Scientific and Technical Publication no. 582.: PAHO. Sala-i-Martín X. (1999) “Health Investment Complementarities Under Competing Risks” (with Will Dow and Thomas Philipson), American Economic Review, December. World Bank .1993. World Development Report 1993, Investing in Health.: The World Bank. World Bank. 2003. World Development Report. Attacking Poverty.: The World Bank. World Health Organization. 2001. Macroeconomics and Health: Investing in Health for Economic Development. Report of the Commission on Macroeconomics and Health. Chaired by Jeffrey Sachs.
top Related Event : 2005 iHEA Conference, Barcelona, Spain, July 10-13, 2005. Key Reading: Health and Economic Growth, G. Lopez-Casasnovas, L. Currais and B. Rivera (eds.). MIT Press, 2005. |
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