The Contribution Of Health To Economic Growth Economics Essay

The linkage between health condition and economic activity has been debated several times in the past, and this issue became even more important in the last few years. This relationship is rather complex. It has been already recognized that increased national wealth is linked with improvement of health at individual and societal level. Furthermore, it is clear that improved health condition has an effect on economic activity and extent of economic growth. Several studies in high-, middle-, and low-income countries examined this linkage. These show that a significant shift in paradigm is observable. According to the new paradigm health was not considered as a pure by-product of economic development, but as a key factor and basic condition for economic growth. This way investing in health became a core part in many nations’ development strategies and policies. At European level the aim of a competitive and dynamic knowledge based community was set, enabling sustainable economic growth, innovation and a stronger societal cohesion.

The issue of contribution of human capital to economic growth was the basis for several discussions and analyses. Until now education was considered as the main component of human capital. In the context of the neo-classical theory, economic growth is dependent on the following factors: stock of capital, stock of labor and productivity. Productivity was considered in the first time as a factor affected by outside forces. Later on this point of view changed by looking at the investment into human capital as a possible source for enhancing productivity and innovation. A research of Becker (1964) was based on the human capital formation. According to him an increase in human capital raises the individual’s productivity. It is reached through investment into education, training and health.

The role of health as another important component of human capital next to education was introduced by Grossman (1972). Grossman constructed a model where the demand for health was applied in human capital theory. Grossman differentiated health as a consumption good and as a capital good. In the case of the consumption good people practically enjoy their well-being and good health condition. When looking at health as a capital good it reduces the number of days spent ill. This way it enhances the number of productive working days and days spent for leisure activities. In this context health is not only consumed (enjoyed by individuals), but produced at the same time as well. Individuals can invest into health to maintain and improve it over time. The model of Grossman received critics as well, but remained a key model of examining the demand for health.

Figure 1: Factors influencing health and outcomes

Source: http://europa.eu.int/comm/health/ph_determinants/healthdeterminants_en.htm

Figure 1 represents factors determining the health status at individual and at society level, and different channels through which health contributes to economic activity. On the left side factors are presented affecting health of individuals: genetics (inherited) lifestyle, education, health care and other socioeconomic and environmental factors. Many exogenous factors affecting the health status can be influenced by public policies. On the right side different ways are presented through which health exerts a direct effect on economic outcomes.

When examining the linkage between health and economic growth the feedback of income on health should be taken into consideration too. Marmot (2002) states there are two ways of through which income influences health condition. On one hand higher income can have a direct affect on material conditions having a positive impact on biological survival. On the other hand higher income positively influences social participation. Thus, individuals have better conditions to manage life circumstances and enhance the feeling of security.

Based on Figure 1 there are four main channels or mechanisms where the effect of health on the economy is explained.

Labor productivity

People with a good health status can produce more within a defined time interval. Higher productivity is originating from better physical and mental health. Furthermore, individuals with improved physical and mental status can use technology more efficient and they are expected to be more flexible too.

Labor supply

The direct effect of health on the labor supply is not obvious in some cases. Good health condition reduces the number of sick days spent, thus increasing the number of productive working days. In this sense it influences decisions on labor supply as well, because of its impact on wages and expected lifetime. In the case when wages are connected to productivity a healthier worker can produce more, thus enhancing wages and this way the labor supply. On the other hand a better health status enables higher lifetime earnings increasing the risk of earlier withdrawal from working. The conclusion can be drawn that these effects are based on individual preferences. Based on this health can affect the economy in a similar way as health affect individual preferences.

Education

Based on the theory of human capital more educated people can reach higher standards in terms of productivity and earnings. With a good health individuals can achieve higher educational qualification contributing significantly to future productivity.

Capital Formation

The key point here is, whether the effects of health at the micro level are successfully applicable at macro or country level, in terms of GDP and growth rate. The mentioned theoretical models already assumed that there should be a positive relationship. Now examining several empirical studies the necessary evidence can be collected to make more accurate judgment regarding this relationship.

In first line, historical studies contributed significantly to the research of this issue. Robert Fogel was considered as the pioneer of the historical study approach. These studies examined the contribution of health to economic growth over a longer time period (1-2 centuries). Fogel (1994) found that the development in health and nourishment resulted a 30% increase in income and 1.15% per capita in the case of the UK, within two centuries.

Researchers paid less attention to the contribution of health to economic growth in the case of high-income countries. Just a few studies were made determining the impact of health on growth specifically. Some of them found even a negative relation between health and economic improvement, but this was mainly due to the use of imperfect health indicators and the institutional policy framework for these countries. Despite the few negative results health still remained as a robust determinant for economic growth. The most commonly used proxies for health are life expectancy and adult mortality. Knowles and Owen (1997) made a research on 22 high-income countries using life expectancy as a proxy for health and found an insignificant relationship between health and economic growth. The results were adjusted by Tompa (2002), where he stated that the insignificant outcome of the study was due to limited variability of life expectancy within the chosen sample of countries. More significant results were achieved by Beraldo et al. (2005). He found that investments in health result a 16-27% increase in growth rates. The work by Suhrcke and Urban (2005) followed a slightly different way by using other indicators. They used non-communicable diseases as a basis to examine the impact of health on growth in high-income countries in a better way. More specifically, cardiovascular disease (CVD) was used as a proxy for health. 26 high income countries were taken as a sample in the time period of 40 years. Results showed that CVD is a robust indicator in the case of high-income countries. A reduction of 10 % in CVD resulted an increase in the growth rate of per capita GDP by 1 percentage point.

The results of empirical studies show that only appropriate factors enable the accurate examination of the relationship between health and economic growth. The best indicators are life expectancy and mortality rate, but in addition CVD is good as well, because it shows more variability among high-income countries than life expectancy does. Furthermore, mental sickness and other morbidity indicators for rich countries are suggested by Tompa (2002).