149 Class Note for ECON 570 at PSU
149 Class Note for ECON 570 at PSU
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Date Created: 02/06/15
Notes on Health and Development Econ 570 Spring 2005 1 Introduction Relationship between health and gdp growth is important and works in both directions This is very important for development and transition because health outcomes are measured much better than national income More important however health can be an important factor in economic performance What makes analysis complicated 7 and interesting 7 is that economic performance also impacts on the health environment1 2 A Brief Survey Life expectancy has risen dramatically during the 20th century and the 19th too This must be important for assessments of GDP and for assessing the determinants of GDP 1 consider the former below with the concept of full income The latter point is worth noting however 2 Health and Growth The effect of economic growth on health is well known Because the demand for health care is income elastic rising per capita income leads to increasing expenditures on health care and improved health status But the reverse link 7 from improved health care to economic growth has recently drawn increasing attention Understanding this link is crucial to the project though it is dif cult due to the presence of causation in both directions The natural mechanism that relates health status to economic performance is human capital theory Health status is a component of an individual s human capital Poor health reduces both the quality and quantity of labor supply It also results in low levels of human capital accumulation Low growth results in poor health outcomes We will do a comparative 1This reverse causality makes estimating the causal effect of health on economic performance dif cult but work in the area usually identi es the effect through timing using childhood health and nutrition inputs as a determinant of adult wages or taking population health in say 1960 as a factor in uencing economic growth during 1960795 Notes on Health Spring 2005 cross country study for transition economies with comparisons to similar income level non transition economies Growth and health are correlated Health is a normal good so greater income leads to greater expenditure on health care But the reverse is also true health status has an effect on growth lmproved health increases the quantity and the e iciency of labor lmproved health not only reduces lost time due to illness It also increases the intensity of work from a given quantity of labor2 It is an investment in human capital and it increases the return to investing in human capital3 Improvements in health have both level and growth rate effects on per capita income Level effects from improved health result from increases in effective labor inputs4 lmproved health contributes to this in two ways First by increasing the supply of labor input due to less time missed due to disease Second by the increase in the e iciency of labor input due to improvements in the quality of labor when individuals are healthier5 Growth rate effects occur because a lower incidence of disease increases the private and social rates of return to human capital investment which in turn leads to higher rates of economic growth Modern growth theory Cf Aghion and Howitt 1998 distinguishes two channels through which human capital accumulation affects the growth rate 0 One approach 7 in the tradition of Lucas 7 argues that differences in growth rates of per capita income are driven by differences in rates of human capital accumulation It is straightforward to show how improvements in health increase the return to human capital accumulation and thus have a direct effect on the growth rate 0 In the second approach 7 Schumpeterian 7 differences in the level stock of human capital affect the capacity of the economy to innovate and catch up with more advanced 2Improved health also affects the choice of occupation Improved allocation of labor can thus result from improvements in health 3Improvements in health status enhance the return to investing in human capital the same way that business insurance increases physical investment 4Economic historians have estimated that up to 50 of the increase in British per7capita income 179071950 due to improved nutrition Fogel 1994 388 5Greater nutrition for example increases the proportion of energy ingested that can be metabolized 7 Atwater effects Fogel 1994 386 Notes on Health Spring 2005 countries Since the stock of human capital is correlated with the level of health achieve ment it is again straightforward to explain the growth impact of health performance Although for technological growth is it the extremes that matter or the average Prob ably the extremes This suggests that there may be increasing returns to health investment lmproved health leads to more investment in human capital and faster growth in per capita income But faster growth in income leads to greater expenditures on health and thus improved health status A virtuous circle results6 0 Azariadis Drazen model has an externality from human capital accumulation but this could come from health Some evidence on the role of health on economic growth comes from cross country re gressions Controlling for other determinants of economic growth Bloom and Sachs 1998 table 6 show that an increase in life expectancy in 1965 of one percent accounted for an acceleration in GDP per capita growth of 3 for the subsequent quarter century One must be careful in assessing this nding however as causation runs both ways and life expectancy is an endogenous variable Still the nding is suggestive and begs for analysis that can sort through the complications of simultaneity lf life expectancy in low and middle income countries increases from 44 years in 1960 to 64 years in 2001 then this must help explain increases in per capita income People can work harder and longer even before we consider any behavioral implications of this 0 this is equivalent to an increase in labor augmenting technical change at least during the transition to the new level of health It should raise the steady state capital labor ratio measured in ef ciency units and thus accelerate growth in transition 6A crucial question for transition economies is whether such a process works in reverse when there is a negative shock to the economy Transition has led to a decline in health performance and in pericapita income Will the feedback from health to growth lead in this case to a vicious circle The effects of health on growth take very long periods to manifest but the key question is whether the current deterioration in the health system will have longelasting effects on economic performance in transition economies Notes on Health Spring 2005 Ratio 1950 1960 1970 1980 i990 2000 2010 2021 2030 EnstAsm SouLhensiAsm Scum Am Figure 1 Ratio of WorkingeAge to NoneWorking Age Population So in crossecountry regressions differences in life expectancy may explain differences in performance We should use initial levels of life expectancy as a conditioning variable lnitial income is insuf cient Two countries with equal 3 but unequal life expectancies ought to produce different grth outcomes This is very important if these life expectancies also impact on the choices of subsequent policies Notice that if there is a lag between improvements in health and increases in income then conditioning becomes all the more important For then countries with good health but low incomes would be predicted to grow faster than otherwise similar economies This is clearly the case for East Asian countries Much recent evidence attributes this grth to rapid accumulation of factor inputs labor human capital and physical capital All of these are impacted by health issues Life expectancy for example rose from 39 years in 1960 to 67 in 1990 The ratio of workingeage people 1564 to dependents 0714 and over 65 rose from 13 to over 2 See for example gure 1 This meant more factor inputs and more savings that could be plowed into capital7 Greater life expectancy led to greater saving for retirement Greater life expectancy led to more human capital accumulation Asia s demographic transition followed the stylized model by starting with a decline in 70f course tlzus is not a steadyrstate effect but it had a major growth Impact precisely when growth accelerated Notes on Health Spring 2005 mortality rates 0 By the late 1940s the crude death rate had begun to decline very rapidly throughout much of Asia The decline proceeded most rapidly in East Asia and was accompanied by an increase in life expectancy from 612 to 746 years from 1960 to 1992 Similar declines occurred in Southeast and South Asia where life expectancy improved from 516 to 672 years and from 469 to 606 years respectively 0 1n the 1950s and 1960s most of the aggregate decline in mortality was driven by declines in mortality among the youngest cohorts Bloom and Williamson 1997 0 There are a number of possible explanations for the rapid decline in child mortality in Asia in the middle of this century One possibility is that in the 1940s Asia escaped from some four or ve decades of relative isolation ushering in an era of transfer and diffusion of new public health programs technologies and techniques For example the medical advances that were implemented in postwar Asia had been accumulating on the technological shelf for at least two decades penicillin sulfa drugs and bacitracin in 1943 streptomycin was isolated in 1943 etc With the advent of these and other drugs diseases that had once killed hundreds of thousands and even millions became treatable at low cost 1n addition the pesticide DDT became available in 19438 0 Another possibility is that increased agricultural productivity and trade in food both improved nutrition suf ciently to lower infant mortality dramatically in less than a decade and did so everywhere in Asia This may be true but it seems unlikely given that the magnitude and timing of the decline in mortality were so similar everywhere in Asia regardless of level of development and agricultural productivity 8To cite just one example DDT spraying in the late 1940s dramatically reduced the incidence of malaria in Sri Lanka the crude death rate declined from 215 to 126 between 1945 and 1950 with the most precipitous drops in the most malarial areas LivieBacci 1992 Notes on Hesnb Spnng 2mm Frgure 2 A SLyhsuc Model ofEasL Asrsn Munde In sny case en1hlysmn ell ss hddsuwior mes rnse Wbsb occurs bben rs bbe dynamcs of demyaphy ss m gure 1 In bbe early penod dependeneyrneresses snd yomh slows Then by bbe 8W5 bbe depend ncynuoxevexses m rbe esrxysrsges dnbe demographm rrsnsrunn nsrngynudb dependency burdens snd fdlmg sbsrss ofwoxklngrage sdubs drrnrnrsb rbe growth dzber esbus rnenrne As rbe umsmon proceeds falhng ynurb dependency burdens snd nsmg sbsrss dz workmgrage sdubs brdrnsre rbe yo mh dzber esbus rnenrne The early burden ofhavmg ew workers snd ssyers becomes s potential ya s drsbrdbnrunnsdexy hgh sbsre d workmgrage sduns ster bbe emnernre gm drssrbsres us she sbsre ofeldexlynses Thus grmb ls rsb slowed due do she burden snd bben seeexemes due do she dmdend Ibe rdes rs gwen m gure 2 2 1 an m Wdlmmlnn Ibere point rs bbsb hanges m demyaphms can suer bbe yowbh rsre Self munuxes go bbru favorable dernegrsbbre changes rbrs leads do s dmdend Notes on Health Spring 2005 YI T2 then the growth rate 0 De ne the growth rate of per worker output as y ln over the interval 1515 k is 1 Yi yittk E111 1 from the neoclassical growth model we assume that growth is a function of the distance from steady state yittk A le39t 2 where A gt 0 and Y is the steady state level of output per worker 0 We assume that Y 6X where X is a matrix with Z determinants of the steady state 0 We are interested in per capita income growth but we have an expression for per worker growth We note that the former can be written as If we take logs and differentiate with respect to time then 3 y 9L 91v 0 Suppose we estimate a Barro type cross country regression for pericapita output Then we have yittk 7T1X 7T2Yz39t WagL 7T4gN 4 where clearly 7T1 and 7T2 depend on the speed of convergence A The important point is that in steady state gL gN so we should expect 7T3 771394 1 Hence normally we ignore this effect 7 net demographic effects wash out 0 But if the economy is demographically unstable then there could be something from these last two terms Notes on Health Spring 2005 many years ago demographers worried that too high a dependency ratio would slow growth But it could also be the case that per capita output can accelerate if gL gt gN Notice that this could happen due to increased nutrition or due to changing demographics 0 both the sources of population growth and the stage of the demographic transition do matter both a decline in child mortality and a baby boom raise the share of young depen dents in the population a decline in mortality among the elderly increases the share of the retired dependent age cohort immigration raises the working age population because it self selects young adultsl and improved mortality among the population at large has no impact on age structure at all 0 Because an economy s productive capacity is linked directly to the size of its working age population relative to its total population distinguishing between the two components when exploring the impact of demographic change on economic performance seems nat ural and worthwhile Consider then Bloom and Williamson s table 3 which con rms that the growth of the working age population has a powerful positive impact on growth of GDP per capita while growth of the total population has a powerful negative impact after controlling for other expected in uences 0 Consider the results reported in column 1b of table 3 The coe icient on the growth rate of the working age population is positive statis tically signi cant and large in magnitude an increase of 1 percent in the growth Notes on Hesnh Spnng 2mm all me at 7 a mm s M a ll 21 We we 3 Flgllle a lsle nuhe Workmgrage poplllsllen ls ssssslslea mh sn lnslesse of 1 4s peran ln lhe yoth me 0mm pel ssplls e The coe nem snlhe yomh lsle nuhe mm population ls negsllve slsllsllssuy slgnl ssnl and slnnsl ss large sn lnslesse of peran ln lhe glowlh lsle nuhe overs poplllsllen e ecmvely lhe dependenl popllmlnn smce lhe emplnssl spear l cauon hnlds xed lhe glowlh lsle snhe warhngrage population ls ssssslslea Wllh s decrease of us pelsenl lnlhe yowthnle 0mm pel ssplls One should wally shelll Kevel se esllsshly hele om economic gromhm demyaphxc e hlll when lhey llse lnslnlnenls lhell esllnlsles do nel change They also show lhsl lz lhe dzpendency gully ls hmhen down mm ynulh and elderly lhsl lhe 1mm sle slslgel alsg The seemmgly dependan elderly eonlllhllle more lo Notes on Health Spring 2005 growth than the dependent youth 7 good for Russia if true 0 How large is the contribution of demographic change to economic miracle They say large two channels increase in hours worked per person increase in savings but very hard to control for endogeneity here 2 2 Full Income These considerations also imply that GDP may not be the best measure of welfare Con sider two economies with similar GDP s but different health levels They clearly do not produce similar levels of welfare for their inhabitants nor will projections of the future be the same To adjust for this some researchers use estimates of the value of a statistical life VSL The latter is derived from observed willingness to pay to reduce risk9 Using this one can look at changes in quot full incomequot by adding the value of changes in annual mortality rates calculated using VSL s to changes in gdp per capita These studies tend to give a different view on inequality full income inequality fell sooner in the developing world than income inequality itself Some studies nd strong evidence for full income convergence even if there is evidence of divergence in gdp per capita 3 Implications for Other Work This is interesting because of the settler mortality instrument Recall the idea is that settler mortality is correlated with institutional choice but not with other factors that predict 9Suppose for example a worker requires and is paid 500 a year of additional pay to accept a more risky but otherwise similar job where the increase in the mortality rate is 1 in 10000 a year the value placed on reducing risk by this magnitude is simply 500 The value of a statistical life is de ned as the observed amount required to accept a risk divided by the level of the riskithat is in the example we have chosen the VSL would be 5 000 000 a number in the range of estimates for the United States today Willingness to pay to avoid risks rises not surprisingly with income A reasonable range of values for a country s VSL appears to be 1007200 times GDP per capita with values estimated in richer countries more likely to occur toward the high end of the range 10 Notes on Health spring 2005 1750 1730 p 1710 a g 1690 A g 1670 E 1650 1630 r r r r r r r r 1710 1720 1730 1740 1750 1760 1770 1780 1790 Birthdecades Sweden Us Slaves Us Free England Bavaria A Northern ta1y Figure 4 lnternational Comparison of Adult Heights growth in income in later centuries The results on health nnay however alter how we view this consider that low settler nnortality irnphes greater average health levels Less disease This leads to better anthroponnetric outoonnes Healthier people can work longer and harder This directly raises perecapita income 0 The average height of soldiers who fought in the American Revolutionary War was an astonishing 173 cnn 68 inches well above European standards for a very long time to conne see Figure 4 This result made it clear that the abundant natural resources of parts of the New World Combined with the propitious disease environment low population density and productivity of the American population conferred considerable e until then unknown 7 biological advantages on its inhabitants Even American adult slaves were tall by modern standards lndeed they were about as tall as American urban workers More importantly those born on American soil were actually taller e had a higher nutritional statusrthan the African populations horn which they originated o Anthroponnetric research on heights is very interesting because heights are very related to the disease environment Eradication of early childhood disease is an important oontributor to increased height 11 Notes on Health Spring 2005 Moreover healthier environments will impact on agents behavior decisions Healthier agents accumulate more human capital They also save more for retirement important pre cisely for the echo when population starts to rise This creates a better economic environment for adoption of new technologies Greater savings plus more educated workforce o Glaeser et al suggest that colonialists brought better human capital with them rather than institutions In addition 1 am arguing that better health environments allowed for further human capital accumulation in such regions 0 The Glaeser et al effect is that the initial stock of human capital is negatively correlated with SM 1 am arguing in addition that the ability to accumulate ho is negatively correlated with SM Thus even if colonists imposed the same institutions in dense and sparsely populated areas we would expect on predicted health outcomes alone that the sparsely populated regions would do better because of the better health environments This further suggests that the appropriate test would require estimating the impact of institutions as the residual effect once the better health environment is accounted for 0 notice that that human capital effect on growth like that of institutions is going to occur with a lag because human capital becomes important for growth later in the process ie during industrialization just like institutions We might also expect that fdi will be related to health outcomes But this could clearly be related to settler mortality and ow for the same reason If regions had high settler mortality they may get less fdi Improvements in health would then lead to more fdi and to subsequently higher growth Lags could be long however 12
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