1.1 Economic Growth Good health is a crucial part of well being, but spending on health can also be justified on purely economic grounds. Investment in health contributes directly to a nation’s economic growth. The most direct effect of improved heath is in terms of improved productivity and reduced absenteeism. Improved health increases the likelihood that children will enrol in and remain in school and learn better. It also frees up resources that get used in health care for other productive purposes. Improvement in survival rates and life expectancy, as a result of improved health, has other benefits as well. As life expectancy increases, individuals save more in order to ensure their income and quality of life after retirement. This increases the overall investment in a nation’s physical capital. In addition, when people live longer, investment in human capital, such as in education, brings about an increase in per capita GDP growth. The interaction of exogenous demographic changes with human and physical capital development can lead to a virtuous cycle of growth, enabling a country to break free of a poverty trap. A major result to emerge from recent research is that survival rates or life expectancy are powerful predictors of income levels or of subsequent economic growth. The studies consistently find a strong effect of health on economic levels or growth rates. Interestingly, economic historians have concluded that perhaps 30 percent of the estimated per capita growth rate in Britain between 1780 and 1979 was a result of improvement in health and nutritional status. That figure lies within the range of estimates produced by cross-country studies using data from the last 30 or 40 years. Health improvements also influence economic growth through their impact on demography. For example, in the 1940s, rapid improvements in health in East Asia provided a catalyst for a demographic transition there. An initial decline in infant and child mortality swelled the youth population, and somewhat later prompted a fall in fertility rates. For India, with a significant proportion of the population involved in agriculture and other forms of manual labour, the health of its citizens is all the more important for poverty alleviation and economic growth. For example, the World Bank has estimated that complete prevention of deformity due to leprosy in India, which affects some 645,000 people, is equivalent to 10% of development assistance received in a year.
1.2 Economic Development As countries develop economically, the structures of economic and social organisations change. At first, the industrial sector tends to grow at the expense of the agriculture sector, and subsequently the service sector increases as a share of the economy. As the population becomes more urbanised, traditional social structures may become less important, and the distribution of income may change. The effects of these changes in social structure on health outcomes are ambiguous. While the nature of health problems may change, the effect on the overall health status of the population is difficult to ascertain. For instance, a switch from agriculture to industrial production may reduce the incidence of some infectious disease primarily found in rural areas, such as schistosomiasis, but such a decrease may be associated with an increase in disease related to pollution, including lung cancer. The ambiguous effects of development on health, increase in income, and hence, in consumption of health-improving goods and services, mean that there is generally a positive relationship between health status and stage of development. There are two important consequences of the improvements in health. One, as populations become healthier, they also age. This is known as demographic transition. The second consequence of improved health is that the pattern of disease changes as development proceeds. This is known as epidemiological transition. This transition is caused because the relative importance of some other diseases rises when some diseases and causes of ill health are eliminated or controlled. The other reason is that as individuals live longer, diseases that only affect older individuals increase in absolute terms. There are direct links between economic development and health indicators such as life expectancy. Some variables, such as geography and demography, indirectly link health with economic growth. Geography, particularly tropical location, is highly correlated with disease burden, which in turn affects economic performance. Demography, on the other hand, is determined in part by health status, and has a direct effect on economic growth through the age structure of the population, in particular the ratio of the working age to the total population. 1.3 Economic Productivity Research has begun to provide clearer evidence of the economic benefits of improving health. But data sets underpinning the research – on characteristics of countries over time or on large numbers of households within a country at a given time – rarely permit conclusive determination of cause and effect. Conclusions drawn from the literature remain, therefore, suggestive rather than definitive. Those conclusions do, though, accord with common sense: healthier people are more productive. Health differences have played a significant role in determining why some countries have grown more rapidly than others have, although technological advances and physical capital accumulation may have been more important still. According to studies conducted by the World Health Organisation (WHO), poor health, in the form of disability, reduces wages by as much as 12% and has negative consequences on labour productivity.
1.4 Learning Poor health and nutrition reduce the gains of schooling in three areas: enrolment, ability to learn, and participation by girls. Children who enjoy better health and nutrition during early childhood are more ready for school and more likely to enrol. Health and nutrition affect a child's ability to learn. Nutritional deficiencies in early childhood can lead to lasting problems: iron deficiency anaemia reduces cognitive function, iodine deficiency causes irreversible mental retardation, and vitamin A deficiency is the primary cause of blindness among children. Several studies indicate that improved health conditions result in higher enrolment in schools by children. 1.5 Climate One line of work, analysing the effects of climate on income, concludes that countries in tropical regions suffer important disadvantages relative to those in temperate zones. In addition to the effects of climate and geography on soil quality, this work suggests that an important causal mechanism through which this effect operates is the interaction of tropical climates and tropical diseases, particularly malaria, which can have a significant cost in terms of economic performance. 1.6 East Asian Experience Asynchronous changes in mortality and fertility, which comprise the first phase of the demographic transition, substantially altered East Asia’s age distribution. After a time lag, the working-age population began growing much faster than the young dependent population, temporarily creating a disproportionately high percentage of working-age adults. This bulge in the age structure of the population created an opportunity for increased rates of economic growth. By introducing these demographic considerations into an empirical model of economic growth, analyses undertaken for the Asian Development Bank (ADB) were able to show that East Asia’s changing demography can explain perhaps a third to half the economic 'miracle' experienced between 1965 and 1990. The ADB study cautions that although a 'demographic gift' provides an opportunity for increasing prosperity, it by no means guarantees such results. East Asia’s growth rates were achieved because government and the private sector were able to mobilise this burgeoning work force by successfully managing other economic opportunities. Adopting new industrial technologies, investing in basic education and exploiting global markets allowed East Asia to realise the economic growth potential created by the demographic transition. The next phase for East Asia will involve less favourable dependency ratio consequent to population ageing. In contrast, both South Asia and Africa are now entering the period when demographic factors can enhance growth prospects. Analysts are extending this research in several ways. 1.7 Health Expenditure and Development As countries develop, their per capita income increases and they tend to devote more resources and increasing share of their national income to health. Government expenditure on health averages 1.2% of GDP for ‘low human development’ countries, 2.2% for ‘medium human development’ countries and 6.1% for ’high human development’ countries. Government spending in India on health is about 1.2%, which is the average for low development countries. (Table 1.1) Compared with other developing nations, the amount spent per capita on health care in India is also very low. It is about one third of the average for developing nations of Asia and about the average for sub-Saharan Africa. (Table 1.2) 1.8 Government Spending Government spending on health has important influences on equity. By targeting spending to areas with high mortality, vectors transmitting diseases such as malaria, schistosomiasis and many other parasitic diseases can be controlled. The communication of waterborne diseases can be managed through safe water and sanitation. This results in improvement of health largely independent of changes in individual behaviour. In addition, such interventions as control of communicable diseases, provision of adequate drinking water and sewerage facilities and regulation of air and water pollution can benefit the poor relatively more than the rich. This is because the poor are less able to compensate, through private spending on preventive measures, for inadequate public investments in these areas. There is also little expectation that private sector or insurance expenditures will benefit the poor. So, in terms of redistribution, if the government fails to target its spending to the poor, no other source of funds is likely to compensate for that failure to any important degree. In India, where state (rather than central) government resources make up the bulk of total public health resources, it is probably to be expected that state-level health spending is higher in states that are richer and in those that have lower infant mortality rates. That turns out to be the case. However, even though the central government targets a small share of its expenditure to the poorer parts of the country, overall central government spending appears not to be targeted effectively to the poorest areas and those with the worst health indicators. India's urban residents, for example, capture a share of the total public health expenditure that is nearly 2.5 times larger than their share in the population. Central government allocations are negatively related to state infant mortality rates, contrary to what might be expected on either health or redistributive grounds. Furthermore, despite India's strong commitment to family planning and its high female mortality rate, maternal and child health programmes are in only a rudimentary stage of development. For the most part, public spending is funnelled through curative institutions.
1.9 Private Spending Many countries are in the midst of an economic, political, and social transformation and are poised for rapid economic growth and human resource development. Despite an increasing proportion of national income devoted to health, government resources are not sufficient to maintain existing health systems, meet increased demand, and improve the quality of care. Attitudes about the role of government in financing health care services have also changed. As a result, many countries have adopted a strategy of encouraging the expansion of the private health sector.
1.10 Health Systems’ Development
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