notes on health economics

1. Health and Economic
Development

2. 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

3. Textbooks on health economics
and development
 Website
Jack Williams: Principles of Health Economics for
Developing Countries
Phil Musgrove: Health Economics in Developing
Countries
– whole book in class readings, up top
World Development Report 1993: Investing In
Health

4. 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.

5. 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

6. 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?

7. Health indicators
 Infant mortality rate (IMR)
 Used as an indicator of the health of the population
 Infants have less developed immune systems
 More likely to die from diseases in the environment
 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 | University of Colorado at Boulder
 Goto find articles and more, economics, economic data

8. Health indicators
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
Table 1: Health Comparisons

9. Nutrition indicators
Undernourishment
(% Pop)
Malnutrition
(% under 5)
Height/
age
Weight/
age
Low
Income
24.63 43.12 43.72
Middle
Income
9.51 27.06 11.11
Source: World Development Indicators 2000, The World Bank.
Long-term measure
of nutrition
Short-term
measure of nutrition

10. 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 (e.g. obestity)
 High incidence of malnutrition very important
because it is often an underlying factor that causes
death from other aliments such as infections
diseases

11. 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 receive government help to solve
health issues – high health exp. can lead to poverty

12. Why worry about poor health
 Health poverty trap
(Sala-i-Martin)
 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)
 Lets see what some of the research says, but first
talk about the methods

13. Econometric methods
Hard to test these theories (see Strauss & Thomas)
Difficult to disentangle correlation and causation
1. Reverse causality
2. Omitted variable bias
Both of these are sometime referred to as endogeneity
Income Health Health Income
Education Outcomes
Health
1.
2. or
Unobservable Parent Characteristics
Child Health Educational Outcomes

14. Economic methods
 Experimental: use an intervention
 Like a drug trial, need to make sure treatment and
control group are similar
 Often better at determining causation because
there are no omitted variable and know direction
of causation.
 Much experimentation with conditional cash
transfers.
 Bangladesh: randomized early childhood
interventions in 1980s now can look at effect on
earnings.
 Many suffer from small sample sizes, so hard to
extrapolate to the population

15. Health and Income/Productivity Eg.
 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 with similar experiment

16. Economic methods
 Non-experimental:
 Household survey
 collect data on health status, wages, and productivity.
 Cross-section
 Observation at one point in time
 correlation between poor health and earnings.
 Better to use a panel data set
 observations on the same individual over time

17. 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.

18. Poverty affects health: Theory
1. Poor cannot buy health care
 Cannot afford to prevent a disease before it
occurs (vaccinations)
 Doctor visit for diagnosis
 Drugs to treat the problem
2. Poor more likely to be malnourished
 Can’t afford food or fertilizer to grow food
 Lack of food and variety
 Immune system weak
 Susceptible to diseases

19. Poverty affects health: Theory
3. Lack of income to buy drugs so
pharmaceutical companies do not invest
drug development for specialize diseases
(i.e. malaria)
 Bill and Melinda Gates Foundation supports
research on diseases that mainly affect the poor
in the South
4. 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
 Use mobile health clinics and foot doctors to
reach the poor in rural areas

20. Poverty affects health: Theory
5. 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
6. Poor and uneducated girls less likely to
refuse sex and more likely have risky sex
leaving them vulnerable to AIDS

21. Poverty affects health: Evidence
 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.

22. Health affects poverty: Theory
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.

23. Health affects poverty: Theory
 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.

24. Health affects poverty
How we might affect h in the model
1. 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.
2. h increases when education increases
 Health improves educational outcomes
(more on this later).

25. Health affects poverty
3. 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.
4. 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.

26. 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.

27. Health affects poverty
Affecting K in the model:
1. 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.
2. 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.

28. Health affects poverty
Effect on Aggregate Efficiency, A
1. 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

29. Health affects poverty
2. Poor health also leads to the wrong choice of
institutions in a country
 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.

30. 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
3. Health inequality leads to less social
cohesion and larger probability of unrest
 Social unrest, violence and fractionalization
are important determinants of economic
growth.

31. Health affect education
Mechanism through which health affects
schooling:
1. Poor nutrition leads to poor brain
development which affects learning
2. Poor health leads to worse attendance and
attention in class
3. Parental death

32. Health affects education
Evidence
 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
 1.3 billion people worldwide infected with
roundworm, 1.3 billion hookworm, 900 million
whipworm

33. Health affects education
Deworming 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

34. Health affects education
Deworming Project in Busia
 Project carried out by a local NGO
 In January 1998, 75 schools randomly
divided into 3 groups of 25 schools:
1. Received free deworming treatment in 1998
2. Received free deworming treatment in 1999
3. Received free deworming treatment in 2001
 Group 1 always the treatment group
 Group 2 control until 1999
 Group 3 control group until 2001

35. Health affects education
Deworming 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
 Results show no impact on cognitive test scores
(from 1998-2000) period

36. 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.
 Better health as a child leads to improved
cognitive ability which can lead to better labor
market outcomes in the future

37. 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.

38. Health and labor outcomes
Evidence 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.

39. 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 randomized 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 and
worsening ADLs
 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)

40. 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.

41. General comments
 Income generating capacity of the poorest is enhanced
more by some health sector investments relative to
others.
 Need to look at the how policies affect different groups and
streamline policies so they are appropriate for each group.
 More emphasis on preventable diseases in developing
countries needed, 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.