Can financial innovations cure the global health crisis?

March 14, 2014

This is the first part of a two-part post discussing economic aspects of health challenges in emerging markets and financial tools that can address them.

In 2012, developing markets surpassed developed markets for the first time in economic output, aggregate demand and financial returns. Without a healthy and productive labor force in these youthful, developing countries, the economic needs of aging, developed markets, including the investment returns and tax revenue necessary to fund pension liabilities, will go unmet. Good health in poor countries has always been an elusive goal, but global interdependence now demands it.

Global health is intrinsically linked to economic growth, yet it remains underfinanced. A meta-analysis of more than 32,000 regressions about growth involving permutations of more than 60 variables shows that initial life expectancy is a positive and significant predictor of economic growth in more than 96 percent of the specifications. These are specifications of econometric models based upon empirical data to predict growth outcomes that are useful in business and in setting public policy. This makes global health one of the most robust predictors of economic growth.

Economists estimate determinants of economic growth by using an aggregate production function that relates the output related to specific inputs (labor, capital, etc.) or factors of production. Researchers add health to the production function and measure the effect of adult survival rates on aggregate output.

David Bloom and David Canning at Stanford show that the result of this exercise is that a one percentage point increase in adult survival rates translates into a 1.68 percent increase in labor productivity. This means that a worker in good health in a low-mortality country will be about 70 percent more productive than a worker suffering ill health in a high-mortality environment. This is a large effect and implies that health differentials account for about 17 percent of the variation in output per worker across countries. This variation is roughly of the same magnitude as the differences accounted for by physical capital (18 percent) and education (21 percent).

The Commission on Macroeconomics and Health of the World Health Organization estimated that 330 million disability-adjusted life years resulting from improved health would be worth around US$180 billion per year in direct economic savings. This improvement could generate $360 billion per year in accelerated economic growth in poor countries from 2015 to 2020. Current analyses suggest that the economic impact of a high incidence of malaria is about a 1.3 percent loss in GDP per year. The economic impact of tuberculosis deaths on sub-Saharan Africa is estimated at $519 billion from 2006 to 2015.

In short, global health R&D and health care delivery improvements will accelerate productivity and growth in the emerging and frontier markets that will be the human-capital driven engines for global growth in aggregate demand in this century. The resulting returns from these investments will finance the future of long-term needs in pension, education, and health for both the developing and developed nations.