The Long-Term Impact of Health on GDP in 19 OECD Countries

The Long-Term Impact of Health on GDP in 19 OECD Countries

Ahmet Gokce Akpolat (Sakarya University, Turkey) and Nurullah Altintas (Sakarya University, Turkey)
DOI: 10.4018/jsesd.2012010104

Abstract

Health is assumed to influence the economy through many channels. It reduces infant mortality and increase life expectancy and adult survival rates. Health level and life expectancy affects long-term savings decisions of individuals. This study examines the relationship between health indicators and economic growth in 19 OECD countries during the period 1970-2009 within a panel data analysis. The authors employ three different measures of health. Results show that an increase in health expenditures and a decrease in infant mortality positively affect GDP in compatible with the theoretical assumptions. However, life expectancy is detected to affect GDP negatively in contrast with the theoretical expectations. In conclusion, health expenditures and services concluded to influence GDP by improving human capital. Furthermore, the authors make suggestions about how economies can remove the burden of aging population.
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1. Introduction

Recent theoretical debates, which are about economic growth literature, intensify around the concept of ‘human capital’. Indeed, Adam Smith, Marshall and Mill are accepted as the first economists that mentioned about human capital. However, like Bowman (1990) says the modern human capital literature is less impressed by the opinions of these three authors (Kibritcioglu, 1998). The related theory is based on the pioneer studies of Becker (1962, 1964) and Schultz (1961, 1962) who are the economists emphasized the importance investment in human capital (Kibritcioglu, 1998). Schultz (1962) states that people can improve their capabilities by investing in themselves. Also, these investments are a strong explanatory of differences in income, wages and salaries. He constructs a theory by propounding three matters: (i) according to the assumption that the ratio of all capital to income is constant and the stock of physical capital has been declining, another compound of capital, which is human capital, has been rising relatively to time. Thus, if the ratio of all capital to income remains constant, the unexplained economic growth can be explained by the rise in the stock of human capital. (ii) the structure of wages and salaries is determined by some factors (schooling, health, on the job training, searching for information about job opportunities and investment in migration) including investment in people. (iii) increase in the ratio of human capital to all capital is more effective on equalizing income and providing a fair income distribution than other factors such as progressive taxation, income transfers. Becker (1964) elaborately explains four resources of investment in human capital. These are, (i) on the job training, (ii) schooling, (iii) other knowledge and (iv) productive wage increases. Lucas (1988) emphasizes the importance of ‘human capital accumulation’ and ‘learning by doing’ concepts (Arrow, 1962) was the first economist who modeled the concept of ‘learning by doing’). Mankiw, Romer, and Weil (1992) set up a model, which is known as ‘human capital extended Solow model’, by incorporating human capital into capital concept. The authors claim that their model is able to explain 80% of income differences among the countries. Their empirical findings support the Solow model, which states that per capita output is equal to the rate of technological progress at the steady state level (Jones, 1998).

As some of which are mentioned above, human capital involves several factors such as education, health, brain drain, quantity of people in dynamic population (Yumuşak & Yıldırım, 2009). The two of these factors of human capital are standing out: Health and education. However, the majority of empirical studies focus on the effect of education on economic growth. Only in the last two decades, empirical studies have started to intensify on analyzing the influence of health on growth (Brempong & Wilson, 2004). We prefer to focus on the impact of health on economic growth, because of this reason.

Health is assumed to influence the economy through many channels. It reduces infant mortality and increase life expectancy and adult survival rates. Health level and life expectancy affects long-term savings decisions of individuals. Improvements in health services indicate its impact on students’ cognitive and learning ability and also reduce abseentism, so lead to a better education. Early life nutrition affects people’s mental and immunosuppresive capability and it increase individuals’ life, education and economic standards.

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