How the health of a nation impacts GDP
I came to Johnson from Harvard Medical School and Harvard School of Dental Medicine, where I will be returning to complete a dual degree (MD & DMD) with a specialty in pediatric maxillofacial surgery. My arrival here reflects a wider scope and interests that transcend clinical medicine—moving toward surgical capacity-building in resource-limited settings, including emerging markets. At Johnson, I focused on strategy, entrepreneurship, and emerging markets, integrating my clinical expertise with relevant business acumen to improve delivery and continuity of care. As a EMI fellow, I found that the Emerging Markets Institute welcomed these distinctive ends to my education.
The impact of health on the economy
As developing countries strive to increase standards of living and develop economically through increased and sustained GDP growth, it is imperative to shift the focus to investments in healthcare. As the World Bank points out, there is a strong and growing body of evidence showing that better heath contributes to more rapid growth of GDP per capita. It is intuitive that healthy workers are more productive. And yet, it can be challenging to quantify how a country burdened by disease and health issues suffers economically. What follows is a high-level overview, a primer into the relationship between health and the economy.
Connections between health and GDP
In a number of ways, health is connected to GDP. For example, poor health reduces both the productivity and the size of the labor force though morbidity and mortality. Given that emerging markets depend more on manual labor than high-income countries do, health has an even stronger influence on human capital by impacting the physical and mental capacity of workers, their productivity, the rate of absence due to illness, and the risk of disability. These factors also have an impact on the wages that workers can achieve because, as Bloom, Canning, and Sevilla have shown, absenteeism and disability can drastically reduce wages, which lower both consumption spending and savings, ultimately impacting GDP. In addition, when health outcomes and life expectancy improve, savings for retirement and the future increase, and in turn, so does GDP.
The World Bank also highlights how the health of a country impacts the education system, and by extension, human capital potential. For instance, a country that suffers from issues with child malnutrition is drastically reducing its economic growth potential; child malnutrition can adversely impact a child’s ability to receive an education due to cognitive and physical impairments. A smaller, less-productive and less-educated work force negatively impacts a country’s GDP per capita.
Standardized metrics for quantifying the impact
As one way to measure the economic impacts of barriers to access to healthcare services, the metric disability-adjusted life year (DALY) was established to quantify economic impacts associated with the health of a population. One DALY is equivalent to one lost year of “healthy life,” and the burden of disease can be captured by summing these DALYs across a population. This sum is often referred to as the gap between current health status and an ideal health status, in which a population has a long life expectancy and people live in a world that is free of disease and disability.
The World Health Organization (WHO) explains how DALYs are calculated, showing that DALYs do take into consideration both morbidity and mortality by accounting for years of life lost due to premature death and years lost due to disability from a health condition or its consequences. DALYs lost can be broken down into numerous categories, such as non-communicable diseases, communicable disease, injuries, etc. Overall, it has been shown that DALYs lost per year decrease with increasing income level, and low- and middle-income economies are negatively impacted more than high income ones due to DALYs lost.
The impact health has on foreign investments and growth rate
Among the factors tying health to economic growth is foreign direct investment (FDI). A healthy nation increases FDI and net capital inflows to a country, a connection supported by the evidence, and shown to be important for economic development, particularly in the long run and especially in low- and middle-income countries.
Health and foreign investments are positively correlated because improvement in health outcomes decreases the risk by giving investors more faith in the labor force, for instance. The amount of foreign investment to a country is negatively correlated with perceived risk so the less healthy a country, the less net capital inflows, which reduces overall investment and lowers the rate of capital formation, and in turn development.
The role of micro-insurance for improving economic growth
As a vehicle for protection against cataphoric and unexpected expenditures, insurance is critical. In 2010, the WHO estimated that about 100 million healthcare seekers are pushed below the poverty line annually due to healthcare payments. The number suffering from lack of access proves larger, including those who were already below the poverty line to begin with.
Unfortunately, many are still excluded from capital markets and insurance programs, especially those without access to credit, collateral, or cash. Micro-insurance was born to help remove the barriers that extremely impoverished individuals face when trying to access insurance with the goal of trying to reduce poverty and improve health outcomes by expanding access to care. Micro-health insurance has been used as a way of risk pooling and reducing out of pocket expenses for those excluded from traditional health insurance programs and focuses on bringing together various elements of multiple solutions with a grassroots approach. These insurance programs account for at least three basic conditions: simplicity, affordability, and proximity.
Micro-insurance is an enterprise of the community, volunteers are the heart of the program, and it places a large emphasis on social capital being used as a form of collateral. This form of insurance is not free, and user pay premiums in exchange for health insurance coverage, which is why social capital proves important for ensuring debtors pay what they owe. It is distinct from many traditional community-based programs in that micro-insurance units are not typically reporting to external entities nor dependent on subsidies, not like traditional community-based programs, which often include governments, NGOs or other organizations in decision-making processes. Likewise, micro-insurance often transcends a single community and establishes networks to link multiple communities together, all to improve the strength of insurance programs by expanding the pool of risk.
Micro-insurance in emerging markets
When looking at various emerging markets, it is clear that governments are investing more in healthcare. However, a gap between supply and demand still exists, which is why private insurance has stepped in with an objective of trying to reduce this gap. It seems that the trend of expanding private health care coverage will continue in emerging markets, with insurers mainly focused on expanding primary coverage to the relatively affluent and employed segments. This further underscores the important role of micro-health insurance since insurers in emerging markets are ignoring a large segment of the population, desperately in need of access to health care coverage.
Research has demonstrated that in the majority of cases micro-health insurance has reduced out of pocket spending, catastrophic health expenditure, total health expenditure, household borrowings, and poverty. Additionally, micro-health insurance has been found to show a positive effect on household savings, assets and consumption patterns. These outcomes positively impact growth and the many factors proven to impact GDP.
Vinit Kr Khicha
Great article, Nicole. This one is very revealing in terms of an economic metric (DALY) for health-related economic and financial osses, the immense power of micro-insurance in EMs, and last but not least, the idea of a subtle correlation between foreign capital inflows in EMs and their population morbidity!
Well written. I must confess ignorance when it comes to healthcare in general and opened my eyes to what is an obvious but at least in my bubble not often made direct correlation between population level health, FDI, and ultimately economic growth in emerging markets. Thanks for sharing!
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