Saturday, November 22, 2008

Does improved health necessarily raise economic growth?

Common belief is that improved health leads to increased prosperity, i.e. a healthy labor force and human resource are assets that contribute to economic growth. Sadly, this seems to be not the case according to two papers, which The Economist cites in its latest edition. The main reason: there is no clear causality between health and economic growth. Regardless of the income level of developing countries, the technological breakthroughs in medicine in the West was made possible there by the WHO, thus improving life expectancy. This has nothing to do with income level of individual countries. Moreover, improved life expectancy amidst stagnation in land and capital resources leads to low per capita, technically.

…the conclusions of two recent papers that improving life expectancy at birth (a common indicator of better health) can depress income per head for as long as two generations may come as a shock.

Beginning in the 1940s, several medical innovations involving penicillin, streptomycin and DDT made it easier to treat diseases—such as tuberculosis, malaria and yellow fever—that disproportionately affected people in developing countries. Because these ideas originated in the rich world and were spread by organisations such as the WHO, any improvements in health they led to would have been unconnected with prior improvements in the economic circumstances of poor countries.

This international revolution in public health did lead to substantial increases in life expectancy in poor countries by the 1950s. However, the researchers found that income per head actually declined when life expectancy went up and did not recover for up to an astonishing 60 years.

Researchers at Brown University reached a similar conclusion…increased population would more than wipe out any productivity benefits of better health. For the first 30 years after an increase in life expectancy from 40 to 60, income per person would be lower than it would have been if life expectancy had not improved. I think looking just at the life expectancy does not capture the whole link between health, poverty, and growth. There are some diseases like fever and cough and cold, which are so common in the developing countries, are not life threatening but helpful medication does improve enrollment rates and less absenteeism from work.

I think transfer of subsidized health services by the WHO from the West to the developing countries acts as a technological shock. The papers are reviving the famous Malthusian argument that increased life expectancy (population) will create shortage of resources and dampen prosperity later on because it assumes that land is fixed. However, given the increasingly globalized world and integration of economies (including labor mobility), technological transfer could offset this effect. The conclusion derived from the papers reminds me of Gregory Clark’s book A Farewell to Alms, where he used the Malthusian argument frequently.

Here is the paper by Acemoglu and Johnson: Disease and Development: The Effect of Life Expectancy on Economic Growth

Here is the paper by Ashraf, Lester, and Weil: When Does Improving Health Raise GDP?

So, what are the policy implications? Does the purpose of investing in healthcare be reconsidered?