Health as a Principal Determinant of Economic Growth

van Zon, Adriaan and Muysken, Joan (2003). Health as a Principal Determinant of Economic Growth. UNU-MERIT Research Memoranda. UNU-MERIT.

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  • Sub-type Working paper
    Author van Zon, Adriaan
    Muysken, Joan
    Title Health as a Principal Determinant of Economic Growth
    Series Title UNU-MERIT Research Memoranda
    Volume/Issue No. 21
    Publication Date 2003
    Place of Publication Maastricht, NL
    Publisher UNU-MERIT
    Pages 41
    Language eng
    Abstract We construct an endogenous growth model based on Lucas (1988) and van Zon and Muysken (2001). The model shows how the provision of health services influences an economy's rate of growth. Since growth is produced using labour services, increasing health activities also implies lowering output and possibly growth. At the same time a good health is necessary to be productive at all. Hence there is a direct trade-off between the health state of the population and growth performance. We add a stylized demographical and epidemiological module to the Lucas model that enables us to distinguish between care activities and cure activities. We illustrate how changes in the rate of morbidity and the rate of mortality influence the optimum allocation of scarce (labour-) resources over its various uses that include care-, cure-, final output production and human capital accumulation activities. We show that in this setting the relation between growth performance and health activities is parabolic. For low levels of health activities growth increases with the size of the health sector, and then starts falling again for further increases in the size of the health sector. Thus we illustrate that an increase in longevity as experienced by Western economies entails lower growth prospects for these economies, while for economies in the development stage, a positive relation between health activities and growth is more likely to exist. For the latter countries a double health dividend may be realized from increasing health care spending, i.e. the population can attain both a higher health level and a higher growth rate of income and consumption per head. For Western economies such a double dividend might still be obtained by increasing the productivity of the health sector rather than by expanding health activities, ceteris paribus. The main conclusion of our model is, however, that human capital accumulation is still the ultimate source of growth, but the health sector is instrumental in realizing the potential of the productive human capital embodied in the population. Because of that, an exclusive focus on cutting current health costs may interfere with the growth prospects of an economy, thus potentially tightening intertemporal macro economic budget constraints rather than loosening them.
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    Copyright Year 2003
    Copyright type All rights reserved
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