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Health expenditure and economic growth: Time series evidence from Pakistan

  • 2018 | Volume: 2 | Issue: 1 | Page: 41-49

Abstract

This research was conducted to examine the causality between healthcare expenditure and Pakistan’s economic growth for the period 1972-2015. Unit root tests, co-integration and causality tests based on Vector Error Correction Model (VECM) were used to examine the short and long run relationship between healthcare expenditure and Pakistan’s economic growth. Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests indicated that health expenditure and economic growth variables are stationary at first difference. Results based on Johansen co-integration showed that the long-run correlation between healthcare expenditure and economic growth of Pakistan exists. Granger causality based on Vector Error Correction Model exhibited no short run correlation between healthcare expenditure and economic growth. Error correction term (ECT) shows that the model is in equilibrium in the long-run. Results of the paper show that healthcare is only a long-run phenomenon. This study recommends that Pakistan’s policy makers should pay great attention to the health sector by enhancing its yearly budget allocation.

Keywords and JEL Classification

Keywords

Economic growth, health expenditure, Granger causality, co-integration, VECM, Pakistan

JEL Classification

F43, H51, I15

1. Introduction

   Growth model highlights the role of human capital in economic growth and development. Health is one of the important determinants of economic development (WHO, 2005). The role of human capital in economic growth cannot be ignored (Riley, 2012). The impact of public health care expenditure on economic growth has been explored in both developed and developing countries. Hashmati (2001) investigated the association between economic growth and health expenditure for OECD countries and concluded that health expenditure has a positive correlation with economic growth.

   Human capital plays a key role for persistent economic growth (Riley, 2012). Human capital includes many factors such as education, health, and migration as well as other investments that broaden the productivity individuals. The development economists have paid greater attention to examine the effect of education on economic growth, while neglecting the role of human capital. Health and other types of human and physical capital enhance GDP per capita by enhancing productivity of labor. Worker are able to work efficiently resulting in theirs’ productivity increase. This further leads to increasing the worker's income, they can now spend on availing better health and enabling them even more work efficiency gains (Akram et al., 2008; Bashir et al., 2012).

   Health is an important part of human development and remained in the focus of government of Pakistan. Government of Pakistan knows that healthy people are the assets of a country and increase in health expenditures alleviate poverty, hunger and improve standard of living. The role of health was reflected in specific measurable targets declared at United Nation Millennium Declaration in 2013. These time bound development goals are based on a vision which are internationally agreed for decreasing poverty, extends gender equality, and increasing opportunities for education and health. As a signatory to United Nations Millennium Declaration, Pakistan is committed to implement/extend the agenda of basic right of health to its people and make policies to achieve the millennium development goals (GoP, 2013). The cost of the healthcare system is an important topic of research. Limited studies have been conducted to examine the impact of expenditure on health and to evaluate its effectiveness. Healthcare is a normal good and any increase in per capita income leads to increases in the demand for healthcare (Kathleen & Julie, 2007).

   The significance of the health sector can also be realized from the fact that out of eight MDGs, three are directly related to the health sector in case of Pakistan i.e. improving maternal health, reducing child mortality and combating HIV/AIDS and malaria. In Pakistan, the development and non-development health expenditures have been increased in the last few years. Still there is enough scope to invest more in the health sector, because the incremental benefits generated by the additional expenditures are leveled off by the rising population of the country (Hussain et al., 2009).

   Some researchers in the past have explored positive and long-run relation between expenditures on healthcare and Pakistan’s economic growth. In addition, the economic growth significantly affects healthcare supply chain logistics investment. On the other hand, healthcare supply chain logistics investment has no impact on economic growth. Economic growth creates difference between developing and developed countries because developed countries spend a larger portion of the income for providing health facilities to its residence as compared to developing countries. That is why in developed countries life expectancy rate is high and that causes developed countries to make development because their workers work efficiently leading to an increase in production of economy (Bukenya and Enyinda, 2009).

   The objective of this paper is to revisit the long-term correlation between healthcare expenditure and economic growth of Pakistan by employing Granger Causality and Co-integration tests. The long-run analysis of healthcare expenditure and growth is necessary to determine the possible effect of health on economic growth. This paper tests the hypotheses that analyze the long-run effect of health expenditure on Pakistan’s economic growth.

2. Literature Review

   Human capital plays a major role in the economic growth and development of a country. In the past, the effect of public health care expenditure on economic growth has been investigated in both developed and developing countries theoretically and empirically. The endogenous growth models have highlighted the significance of human capital in both economic growth and development. Good health leads to higher labor productivity (WHO, 2005). Hashmati (2001) applied the Solow growth model and explored the correlation between economic growth and health expenditure by using OECD countries’ data and concluded that a positive association between health expenditure and economic growth existed. Kwak (2009) found similar results in their study. Arısoy et al. (2010) and Eryiğit et al. (2012) also found a positive correlation between health care expenditure and economic growth using time series data in case of Turkey. Aurangzeb (2001) applied the augmented Solow Growth model using time series data for Pakistan for the period 1973–2003 and found a positive and significant correlation between health expenditure and economic growth. Bashir et al. (2012) examined the impact of education and health expenditure on economic development by using time series data for Pakistan. They concluded that these factors play significant role in the economic development of Pakistan.

3. Research Methods

4. Results & Discussion

5. Conclusion

   This paper analyses the short-run and long-run dynamic of health expenditure on Pakistan’s economic growth. Co-integration and Error Correction techniques were applied to attain the objective of the paper. Health plays a significant role to determine economic growth in the long-run. Results of Vector Error Correction model (VECM) indicated that health expenditures do not have significant impact on economic growth of Pakistan in the short-run. However, results obtained from Johansen co-integration tests reveal that health expenditure has long-run significant effect on economic growth. Economic growth has also long-run significant impact on health expenditure. Results of this paper suggest that health is a long-run phenomenon.

References

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