Does Investing in Healthcare lead to Economic Growth?

By Abhinav Saggar

Health and economic growth are governed by a vicious cycle. Each element is completely correlated with the other and any deviation in one has the subsequent effect. Health affects economic growth directly and indirectly, and both elements share a delicate balance. Even micro-level dealing with health can have macro-level effects on economic growth and development. The World Health Organization (WHO) has estimated that a 10-year increase in life expectancy at birth can increase economic growth by 0.3-0.4% annually. One of the most widely accepted measures of economic growth and development is the GDP per capita of the country. The point of focus for this argument is how better health vis-a-vis increased household income can consequently lead to growth and development of a country. 

A healthy individual is not only more productive and creative, instead children with better access to healthcare facilities – may lead to more productive adults in the first place. However, before understanding the correlation between health and economic growth, we first look at the methodology for measuring health. There are two types of indicators – Mortality and Morbidity. Mortality indicators include life expectancy and under-five mortality (number of children who die before the age of five per 1000 live births). Morbidity indicators include studying the patterns of children who are stunned, underweight or wasted. Reverting to the correlation, since healthier populations tend to have higher productivity, healthy individuals have the increased ability to produce newer ideas. Higher human capital contributes to technological advancement, which translates into higher economic growth. Another reason is that healthier populations tend to have lesser income inequalities. Improvement in health means that the productivity of poorer populations is at par with the richer populations, so the inequality gap reduces as healthcare facilities improve. But how to measure the effect of healthcare facilities for the entire economy? To understand this effect, we develop a model to see how healthcare can affect the household income of individuals, and how this has an amplified effect on the economy.

Hence, we can say that better healthcare facilities have a direct impact in terms of higher labour productivity. The indirect effects affect the GDP per capita via improvements in household income. First, health – efficiency – income. A healthy person is more efficient and active than an ill person. A healthy person is more able to work and thus, can earn more. The productiveness of an individual directly affects his/her income. Due to high rates of HIV/AIDS in Southern Africa, workdays lost due to sick employees were high because the workers were either sick or were engaged in taking care of the people who were sick. Second, health – education – income. Investing in healthcare affects economic growth since better health ensures higher future income through the impact that it has on education. When a family is healthy, both mother and father can hold a job, which means that they can earn money that is sufficient enough to feed them and look after their health. A healthy and well-nourished child is likely to attain higher education, because of better attention span and better cognitive skills. This is instrumental for low absenteeism rates. Therefore, this enhances the opportunity of higher future incomes. Another thread that runs parallel to the importance of educational attainment is that educated parents prefer to have fewer children, hence they are more efficient in diverting their resources to each one of them. Third, health – investment/savings – income. When children have higher chances of reaching adulthood, the parents save accordingly to invest in their child’s education at later stages. Reduction in mortality increase investment in human capital, which in turn ensures higher productivity. Both lower fertility and higher human capital investment contribute to higher future income, thus higher economic growth. 

Infant mortality and Life expectancy are directly related to GDP per capita of a country. Figure 1 and Figure 2 given below show the trends of the above-stated factors on GDP per capita.

 

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Health and economic growth are the elements of a cycle, which means that their relationship is not just causal. There also exists a reverse relationship where economic growth drives health. This argument is based on the theory given by Samuel H. Preston in 1975. The Preston Curve describes the cross-sectional relationship between life expectancy and income (GDP per capita). The curve clearly shows that initial increases in income have huge impacts on life expectancy. And any subsequent increases in income improves life expectancy but at a diminishing rate. Another example which exhibits that higher income leads to betterment in health is studying the correlation between child mortality rates and income. With a marginal increase in income at low-income levels, the child mortality rates fall drastically.  And any consequent increases lead to a fall in the mortality rates at a diminishing rate. 

 

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We can conclude that healthcare and economic growth are in fact bound in a vicious cycle, however, they have different correlations with each other. Healthcare and income have more of a direct and causal relationship, higher investment in health results in higher income generation. On the other hand, even though higher income leads to better investment in healthcare, the relationship is not as strong as the former. This is an association rather than causality. The Millennium Development Goals and Sustainable Development Goals focus extensively on improving global healthcare. 

Abhinav Saggar is an undergraduate student at Ashoka University of Economics and Finance

Picture Source

https://www.google.com/url?sa=i&source=images&cd=&ved=2ahUKEwjFy5iSv-_kAhV4_3MBHQ32AmYQjRx6BAgBEAQ&url=https%3A%2F%2Fwww.franchiseindia.com%2Fwellness%2Fgrowth-drivers-of-indian-healthcare-industry.11123&psig=AOvVaw1IeKsHrlAuCBVUsrQTSPG8&ust=1569621824384217

 

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