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?

Capitalism with Chinese Characteristics

Here is an interesting piece about the Chinese economic model. Professor Yasheng Huang challenges the Beijing Consensus (that incremental privatization in rural areas was the key to increased prosperity) and says that rural privatization has actually been rolled back in the past 15 years. TVEs led to helped reduce poverty by 154 million between 1978 and 1988 but after this rural privatization was rolled back by restricting loans to entrepreneurs willing to invest beyond agriculture sector and taxes were raised in the rural areas to fund urbanization. Interesting!

He argued that the reforms in the 1980s were very far reaching and substantial for private sector development, especially in rural areas led by township and village enterprises (TVEs). In the 1990s, however, those reforms slowed, and privatization was rolled-back.

From 1978 to 1988, poverty in rural China declined by 154 million people, while it only declined by 62 million people from 1989 to 1999. Huang argued that the key to the greater success in the 1980s were TVEs, which were a focus of the early reforms of the 1980s. Out of 12 million TVEs existing in 1985, fully 10 million were totally private. Along with an abundance of government loans that were easily accessible to small businesses, this strategy created rapid poverty alleviation.

In the 1990s a fundamental reversal was made in rural policy. First, there was a substantial increase in the qualifications enterprises needed for loans. Second, the government’s loan policy emphasized agricultural production instead of expanding rural entrepreneurship beyond agriculture. Farmers found it difficult to obtain money to start a non-agricultural business. Third, although most Chinese live in rural regions, a new focus was put on developing the urban regions. To pay for these urban reforms, the government heavily taxed rural citizens and reduced services in rural health and education. The result of these policy changes was a reversal that slowed down rural poverty alleviation and sharply increased the gap in urban-rural household income. 

Though Huang made a strong case for widely varying economic policies in China between the 1990s and 1980s, his explanation for the reversal, he admitted, is not based on an exhaustive review of the facts. Nevertheless, he suspects that the reason is technocratic. In the 1980s, the Chinese Communist Party (CCP) was led by individuals who grew up in rural regions, while the leadership of the 1990s came from urban areas. Furthermore, this may explain why today’s CCP leaders, like rural-born Hu Jintao, are refocusing on rural reforms.

Here is his book Capitalism with Chinese Characteristics: Entrepreneurship and the State reviewed by The Economist.