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Health Economics. Lecture 2: Health and Economic Development. Outline. Health Indicators Econometric Methods Link between Poverty and Health Link between Health and Poverty Link between Health and Education Link between Health and Labor Outcomes.

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Health economics

Health Economics

Lecture 2:

Health and

Economic Development



  • Health Indicators

  • Econometric Methods

  • Link between Poverty and Health

  • Link between Health and Poverty

  • Link between Health and Education

  • Link between Health and Labor Outcomes

Textbooks on health economics and development

Textbooks on health economics and development

  • Website

    Jack Williams: Principles of Health Economics for Developing Countries

    Phil Musgrove: Health Economics in Developing Countries

    – online

    World Development Report 1993: Investing In Health

Health expenditures

Health expenditures

Table 1: Health Comparisons

  • US spends per capita 70% (~$2,000) more than other high income.

  • High income countries spent 103 times the amount of low income countries and 26 times more than middle income countries.

  • Notice that even upper middle income countries spend 10 times less than high income countries.

  • Substantially less total dollars per person going into health.

Health expenditures1

Health expenditures

  • As a percent of GDP low and middle income countries spend about the same on health

  • So they are all putting a similar priority on health care spending in the economy

  • Higher income countries spend 4 percentage points more of GDP on health, 10%

    • This shows the priorities are not so out of line, just the poorer countries don’t have such large economies so in total spend less

Health expenditures2

Health expenditures

  • People have to pay more out-of-pocket in low-income countries as compared to high-come countries.

    • Low income: 1% government, 4% private

    • Middle income: 3% government, 3% private

    • High Income: 6% government, 4% private

    • As countries get richer they are more able and willing to spend public resources on health care.

  • Why might this be?

Health indicators

Health indicators

  • Infant mortality rate (IMR)

    • Infants have less developed immune systems

    • More likely to die from diseases in the environment

    • Used as an indicator of the health of the population

  • Nutrition

    • Nutrition is a good measure of general susceptibility to health since it is the under lying cause of many disease.

    • Malnourished have a weaker immune system

    • Harder to find data on nutrition

  • Source of the data is the World Development Indicators, The World Bank

    • University Libraries | University of Colorado at Boulder

    • Look under economic data

Health indicators1

Health indicators

Table 1: Health Comparisons

Health indicators in developing countries fall short of developed countries

  • e.g., life expectancy at birth for females is:

    • Low income countries: 59

    • Middle income countries: 72

    • High income countries: 81

  • The gap between the rich and poor has decreased over the years.

    • e.g. In 2000, life expectancy at birth for women is 22 years less in low income as compared to high income countries. In 1960 the difference was 28 years.

  • Great improvements in access to water but still very high IMR in developing countries

Nutrition indicators

Nutrition indicators

Source: World Development Indicators 2000, The World Bank.

Health indicators2

Health indicators

Table 2: Health indicators

  • In lower income countries:

    • Higher prevalence of malnutrition

    • Much higher incidence of preventable diseases (e.g. TB)

    • Every year more than 10 million children die from preventable diseases (World Bank, 2003)

  • Types of health problems different in developed and developing countries

  • High incidence of malnutrition very important because it is often an underlying factor that causes death from other aliments such as infections diseases

Health indicators3

Health indicators

Difference in health outcomes between developed and developing important

In Developing Countries:

  • Age distribution of ill health tilted toward infants and pre-school children – policy tilt as well

  • More communicable than non-communicable

  • Adults more likely to be afflicted with health problems

    • Result of poor health when a child

    • New health problems in adulthood

  • Less likely to recieve government help to solve health issues – high health exp. can lead to poverty

Why worry about poor health

Why worry about poor health

  • Health poverty trap


    • Link between poverty (income) and health

    • Link between health and poverty

  • Links between health and education (Miguel)

  • Links between health and labor outcomes (Thomas & Strauss)

Econometric methods

Econometric methods

Hard to test these theories (see Strauss & Thomas)

Difficult to disentangle correlation and causation

  • Reverse causality

  • Omitted variable bias

    Both of these are sometime referred to as endogeneity








Education Outcomes


Unobservable Parent Characteristics

Child Health

Educational Outcomes

Economic methods

Economic methods

  • Experimental: use an intervention

    • Often better at determining causation

    • Many suffer from small sample sizes, so hard to extrapolate to the population

  • E.g., Impact of schistosomiasis on output of sugar cane workers in Tanzania

    • Schistosomiasis is a parasite. Causes fatigue, fevers, and aches. From slow-moving water.

    • Divide workers into those with and without Schisto

    • Those with, half treated and other half not treated.

    • Measure earnings before and after experiment (earnings based on sugar cane cut).

    • Found a positive impact in Tanzania but not impact in Cameroon

Economic methods1

Economic methods

  • Non-experimental:

    • Use a household survey on a population. Make sure collect data on health status, wages, and productivity.

    • In a cross-section (one point of time) can look at the correlation between poor health and earnings.

    • Better to use a panel data set (observations on the same individual over time).

    • Just use the data you observe, don’t try to adjust outcomes by using an intervention on some part of the population

Health poverty trap

Health poverty trap

  • Low income tends to cause poor health and poor health in turn causes low income.

  • Policy must therefore address both health and poverty simultaneously.

    • This is what conditional cash transfer are trying to do.

Poverty affects health

Poverty affects health

  • Poor cannot buy health care

    • Cannot afford to prevent a disease before it occurs (vaccinations)

    • Doctor visit for diagnosis

    • Drugs to treat the problem

  • Poor more likely to be malnourished

    • Can’t afford food or fertilizer to grow food (not a varied diet)

    • Immune system low and more susceptible to diseases

Poverty affects health1

Poverty affects health

  • Lack of income in developing countries to buy drugs means pharmaceutical companies do not invest in R&D on types of drugs they need (different diseases, i.e., malaria)

    • This is partly why the Bill and Melinda Gates Foundation supports research on diseases that mainly affect the poor in the South

  • Poor are more likely to live far away from doctors and hospitals

    • Transportation costs are large

    • Poor more likely to go untreated

    • Certainly holds for rural poor, may not hold for urban poor in all countries

    • One policy response has been to have mobile health clinics and foot doctors to reach the poor in rural areas

Poverty affects health2

Poverty affects health

  • Poor less likely to be educated

    Many studies have shown the more educated mothers (literacy) have healthier children

    • Educated mother understands sanitation better (wash hands using soap, drink clean water)

    • Can read so knows how to make and use ORT (Oral Rehydration Therapy)

    • Knows not to use rusty razor or scissors when cutting umbilical cord—neonatal tetanus

  • Poor and uneducated girls less likely to refuse sex and more likely have risky sex leaving them vulnerable to AIDS

  • Poverty affect health evidence

    Poverty affect healthEvidence

    • There has recently been causal evidence of the link between income and health

    • Duflo 2003 and Case 2001:

      • Study of the effect of increasing the amount and coverage of the social pension program in South Africa for the elderly black population found that income transfers also led to nutritional improvements among girls.

    Health affects poverty

    Health affects poverty

    Human Capital:

    • Economist Theodore Schultz invented the term in the 1960s to reflect the value of our human capacities.

    • He believed human capital was like any other type of capital. It could be invested in through education, training, and enhanced benefits that will lead to an improvement in the quality and level of production.

    • Health and education are thought to be two of the most important ways to improve one’s human capital.

    Health affects poverty1

    Health affects poverty

    • Use an aggregate production function to help understand the channels through which health affects poverty.

      Y = AF(K,hL)

      Y=output (GDP) ; A= efficiency parameter;

      F( )=production function; K=physical capital;

      L=labor; h=quality of labor or human capital

    • GDP growth only occurs if there are increases in efficiency (technology), level of physical capital, or quality or quantity of labor.

    • Think about the case of India in high tech.

    Health affects poverty2

    Health affects poverty

    How we might affect h in the model

    • health improves h by improving labor productivity

      • Can do more in the same amount of time if are healthy.

      • Unhealthy people are more likely to have lower incomes and experience lower income growth.

    • h increases when education increases

      • Health improves educational outcomes (more on this later).

    Health affects poverty3

    Health affects poverty

    • Employers don’t want to support job training for sick workers

      • In HIV/AIDs prevalent area, some companies prefer to give training to the old than the young, because the young may die.

    • Poor health in a region tends to lead to lower human capital accumulation and hence lower incomes (quantity-quality trade-off)

      • Parents living in areas where child mortality rates are high tend to have many children instead of having a few children and investing in their human capital.

    Health affects poverty4

    Health affects poverty

    • Low life expectancy leads to lower investment in education and health because less years to reap the returns to those investments.

    • If you live in high disease environments it is more likely one or more of your parents will die. This affects the level of education and health of the child (human capital).

      • This is especially the case in HIV/AIDS prevalent areas.

        • By 2010 estimated that 20 million and Africa will be AIDS orphans. (UNAIDS)

      • This is a function of less family income, but also the presence of the parent.

        • Helps with homework, recognizes sickness and knows remedies.

    Health affects poverty5

    Health affects poverty

    Affecting K in the model:

    • Poor health reduces national savings and capital accumulation

      • When life expectancy is close to retirement age people do not save and invest as much as when people live long after retirement.

    • Complementarities between physical and human capital

      • If human capital is needed to effectively use the physical capital, then low human capital will lead to lower capital accumulation.

        • Firms don’t want to invest in countries with an unhealthy, uneducated labor force.

    Health affects poverty6

    Health affects poverty

    Effect on Aggregate Efficiency, A

    • Aggregate efficiency if affected by technological advances.

      • Low human capital may lead to a lower rate of technological advances.

        • This assumes more health people = more technical advances

        • May only need a core group.

    Health affects poverty7

    Health affects poverty

    • Poor health also leads to the wrong choice of institutions

      • Acemoglu, Johnson, and Robinson (2001, 2002)

      • Argue colonial power determined the institutions they set up based on the disease environment.

      • Land inhospitable: set up extractive institutions ones that may not have dealt with property rights, rule of law, education systems.

      • Land hospitable: would send their own citizens to set up more comprehensive institutions that dealt with long-term growth of the country.

    Health affects poverty8

    Health affects poverty

    • Countries inherited these colonial institutions and their problems. Believed that quality of institutions really affects economic development

      • World Bank has spent the past decade on institution building or capacity building

  • Health inequality leads to less social cohesion and larger probability of unrest

    • Social unrest, violence and fractionalization are important determinants of economic growth.

  • Health affect education

    Health affect education

    Mechanism through which health affects schooling:

    • Poor nutrition leads to poor brain development which affects learning

    • Poor health leads to worse attendance and attention in class

    • Parental death

    Health affects education evidence

    Health affects educationEvidence

    • Non-experimental research on the impact of child health on education is ambiguous.

    • There is experimental research which may show a causal link between health and education (too early to tell).

      • Important example is the Primary School Deworming Project in Busia, Kenya

    Health affects education deworming project in busia

    Health affects educationDeworming Project in Busia

    In Econometrica Miguel and Kremer, 2004

    • Worm infections lead to anemia, protein energy malnutrition, stunting, wasting, listlessness, and abdominal pain.

    • Get rid of worms using low cost drugs at appox. 6 month intervals (<50 cents per person per year).

    • Want to test if health impacts educational attainment.

    • Test by treating worms

    Health affects education deworming project in busia1

    Health affects educationDeworming Project in Busia

    • Project carried out by a local NGO

    • In January 1998, 75 schools randomly divided into 3 groups of 25 schools:

      • Received free deworming treatment in 1998

      • Received free deworming treatment in 1999

      • Received free deworming treatment in 2001

  • Group 1 always the treatment group

  • Group 2 control until 1999

  • Group 3 control group until 2001

  • Health affects education deworming project in busia2

    Health affects educationDeworming Project in Busia

    • Surveyed children 2 or 3 times a year

    • Program lead to immediate health gains

    • 25% reduction in worm infections

    • percentage of children reporting being sick in the last week dropped from 45% to 41%

    • Small reduction in malnutrition

    • Reduction in school absenteeism by 7 percentage points

    • Early results show no impact on cognitive test scores (from 1998-2000) period

    Health and labor outcomes

    Health and labor outcomes

    • Better health may improve wages and labor productivity (hours supplied/work done)

      • Can work more hours and get more done during the same amount of hours when are healthier.

    Health and labor outcomes evidence

    Health and labor outcomes evidence

    • Taller people earn more and are more likely to participate in the labor market

      • Height reflects investments in nutrition and health as a child (human capital)

      • Robert Fogel (1992,1994) argues that movements in adult height reflect long-run changes in standards of living (income, mortality, morbidity).

        • Review Figure 1 & Table 1 from Strauss & Thomas

      • Correlation between height and wages. Figure 2.

    Health and labor outcomes evidence continued

    Health and labor outcomesEvidence continued

    • Using different health measures

      (morbidities, ADLs, health limitations)

      • ADLs = Activities of daily living

        • Can you walk 5km without getting tired

        • Can you lift a 2 pound weight

        • Days of limited activity

      • Find poor health reduces labor supply

      • Evidence of poor health on wages and productivity is mixed.

    Health and labor outcomes evidence continued1

    Health and labor outcomes Evidence continued

    • Used ADLs to explain labor force participation in Jamaica and Taiwan

      • Participation = f(ADLs)

    • In Indonesia they used a random experiment

      • Treatment areas: price of health care increased

      • Control areas: price of health care remained same

      • Find increases in price lead to decrease in utilization

      • Find worsening of ADLs lead to lower male labor supply

      • But find that self reported health status is better in treatment areas

        • Self reported health status likely to be worse among those who have greater access to the health system (concept of illness)

    Health and labor outcomes evidence continued2

    Health and labor outcomes Evidence continued

    • Lots of evidence to suggest that better nutrition leads to better health outcomes

    • Low nutrition intakes impacts productivity negatively

      • Not just the calories or protein you eat it is also the quality of the calories. Need micro-nutrients, e.g., iron and vitamin A for the brain to function properly.

      • Policy implication is iron fortification of flour and fortifying milk with vitamin A.

    Policy implications

    Policy implications

    • Income generating capacity of the poorest is enhanced more by some health sector investments relative to others raises issues revolving around the distribution effects of policies.

    • More emphasis on preventable diseases, yet you’ll see a lot of money is put toward high tech cancer wards in some of these countries.

    • If public investment in health infrastructure and interventions yields benefits in terms of higher productivity and economic growth, then those benefits belong in evaluations of health programs.

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