Public health, human capital and economic growth
By
Yih-chyi Chuang
Department of Economics
National Chengchi University
Human capital has been widely recognized, theoretically and empirically, as an important driving force for endogenous growth of an economy. In the literature, there are two machenisms that human capital may generate endogenous growth. On the one hand, Becker and Lewis(1973) and Becker and Murphy (1992) argue that as the income increase the opportunity cost of having a child and direct costs of raising and educating a child are also increased, however, substitution effect dominates income effect such that parents will choose to substitute quantity for quality by reducing the number of children and increasing investment spending in each child, the so called quanty-quality trade-off hypothesis. This human capital-driven machenism will enable the country to escape from the Malthusian trap. On the other hand, Galor and Weil (2002) emphasize the population size as the driving force for technological change and technical improvement will increase the rate of return to education, which then triggers the quantity-quality trade off by increasing children’s education investment. As the human capital accumulated, it further generates technological change and brings in virtue circle of human capital-driven growth mechanism. As stated, both types of human capital growth model require a precondition either increase in income or population expansion.
However, we obsertved that in history many countries experience sharp decline in birth rate and fertility rate before rapid economic growth. See, for example, England in the 18th century, China in the 1960s before economic reform in late 1970s, and Taiwan in 1950s before its industrialization started in 1960s. To be consistent with these historical facts, we construct a growth model by incorporating public health into household intertemporal decision making. Public health improvement significantly reduces death rate, especially infant mortality rate, which in turn reduces fertility rate for a given expected number of children and enhances private investment in both education and health. Human capital investment throught quantity-quality trade off thus accelerates the long-run growth of the economy. Noted that without initial improvement in public health, it is unlikely for individual household to invest in private health spending as the high mortality rate offsets the incentive and benefit for human capital investment. The economy is thus stuck in stagnation. Our result has a strong policy implication that a developing country can create an environment which is conducive to private human capital investment by investing in public health first. That is, public health improvement can be the prerequisite for generating subsequent private human capital investment. We further use numerical analysis to caliberate the model. With appropriate parameters consistent to real world estimation, we find a growth trajectory for a poor economy to converge to a wealthy economy within a finite time frame.
JEL: I18, O15
Keywords: public health; human capital; quantity-quality trade off; endogenous growth
Yih-chyi Chuang, Department of Economics, National Chengchi University, Taipei 116, Taiwan, ROC. E-mail address: ycchuang03@gmail.com.