Cover Image
close this bookHealth Economics for Developing Countries: A Survival Kit (London School of Hygiene and Tropical Medicine, 1998, 134 p.)
View the document(introduction...)
View the documentPublication Series - Health Policy Unit
View the documentAcknowledgements
View the documentPreface
View the documentChapter 1: Health Economics and its Contribution to Health Planning
View the documentChapter 2: Economic Development and Health
View the documentChapter 3: Financing Economic and Health Development
View the documentChapter 4: Health Care: the State versus the Market
View the documentChapter 5: Demand, Supply and the Price System
View the documentChapter 6: Concepts of Economic Efficiency
View the documentChapter 7: Inputs, Resources and Costs
View the documentChapter 8: Outputs, Health and Health Indicators
View the documentChapter 9: The Techniques of Economic Evaluation
View the documentChapter 10: National Accounts and the Health Sector
View the documentChapter 11: Health Sector Finance and Expenditure
View the documentChapter 12: Sources of Finance for the Health Sector
View the documentChapter 13: Budgetary Procedures: Budgetary Reform and Programme Budgeting
View the documentChapter 14: Approaches to Financial Planning: Resource Allocation Planning and the Financial Master Plan
View the documentSelected Bibliography
View the documentGlossary
View the documentBack Cover

Chapter 2: Economic Development and Health

1. Economic Development

Development means the regular unfolding of latent possibilities (as with the physical and mental development of a child). At the level of whole populations and nations, it refers to an historical process that has many aspects. Three important aspects considered here are: economic (which also has social and political implications), demographic and health.

1.1 The process of economic development

The idea of economic development is currently used in two ways:

- to arrange nations and communities on a scale from poor (less developed)
- to rich (developed) to refer to the process by which poor nations become richer.

Income per head ranges greatly between the nations of the world, from US$150 in parts of Africa and south Asia to over US$12000 in the United States, Switzerland and Scandinavia. There tends to be a systematic relation between income and other differences which include:

- pattern of production (eg. agriculture is more important in poor countries)

- pattern of trade (eg. poor countries tend to import manufactured goods, export primary products)

- energy use (eg. poor countries use less non-human energy per head)

- consumption patterns (eg. poor countries spend relatively more on food, little on consumer durables)

- degree of urbanisation (in poor countries a smaller proportion of the population lives in towns)

- demography

- health levels and health inputs.

Many of these differences between countries correspond to changes over time in the history of present 'developed' countries. Hence economists have built up a model of development as a process accounting both for the historical experience of developed countries and for present comparative data (the present rich countries are assumed to have started the process early, the poor ones late). This process is sometimes seen in terms of 'stages of growth'.

In the 1950s the driving force for this economic process was seen as investment (growth of physical capital such as roads, dams and factories). This leads to increased output, which in turn makes resources available for further investment - provided they are not swallowed up by population growth or increased consumption. The model was common to 'capitalist' and 'socialist' theories of development. The essence of development policy, following this view, is to invest more while holding down the rate of increase of population and consumption.

However, events in the 1960s and 1970s made this view of development seem oversimplified because 'investment' involves not only physical capital but also finance, technology and social organisation, each of which has special problems; and external trade and finance impose important constraints on development (taken up in chapter 3).

Economic development is, therefore, no longer seen simply as a process of injecting capital into the economy with automatic benefits in terms of production and human welfare. It is recognized that it may even have negative side-effects. Because capital is not a 'magic bullet', planning for development becomes much more complicated; it must take into account all aspects of the economy including health.

Although economic development has its own momentum, there has been agreement since the 1950s that it can at least be stimulated and its effects controlled, and that this involves some form of planning. There is a theoretical distinction between three approaches:

- 'laisser faire' where intervention is limited to providing favourable conditions for private industry, the benefits of which 'trickle down' to the whole population

- 'democratic socialist' where stale intervention is more active and much attention is given to distributing the benefits of development through social services

- 'Marxist' where the crucial step is the transfer of power from a ruling class (capitalist or feudal) to the party representing the people; distributing benefits then becomes merely a technical planning problem.

In practice, whatever the approach adopted, most poor countries succeeded between 1950 and the mid-1970s in expanding national production, slowing population growth (so that average income rose in almost all countries), and improving the conditions of life sufficiently to produce a general increase in the expectation of life.

On the other hand, these successes were not inconsistent with an increasing absolute income gap between the richest and poorest countries, an increasing absolute number of poor and illiterate in the world, and a recognition that the groups and classes involved in development continually used their political power to protect and further their interests. For example: developed countries try to preserve existing patterns of trade and finance, so that gains flow from the 'periphery' to the 'centre'; elites in developing countries try to corner the gains on development and multinational corporations use their bargaining power for the same purpose.

Further, development has been a highly uneven process. Some 'newly industrialized countries' (NICs) seem to be well on the way to developed status (e.g. Singapore, South Korea). Other countries appear to be economically static (e.g. Ethiopia) and international 'poverty belts' exist in sub-Saharan Africa and, to a lesser extent, in southern Asia.

Since 1975 economic growth everywhere has been lower or even negative following the large oil price increases of 1973-74, a rise in other product prices, and substantial borrowing by developing countries to address the resulting balance of payment problems (see Chapter 3). However, the cost of debt servicing has only exacerbated these problems and the 'debt crisis' of the 1980s has been the ultimate result - with developing countries unable to re-pay loans and international banks required to re-negotiate them in order to avoid a collapse in the international banking system. Not only have these problems inevitably meant that investment in social services could not be maintained at previous levels by many (non-oil importing) developing countries, but they have also come under direct pressure, for example from the International Monetary Fund, to cut their public expenditure as part of a package of 'structural re-adjustment' measures designed to address the crisis.

1.2 Demographic development

Economic development is paralleled by a process of change sometimes called the 'demographic transition'. For much of human history populations have grown very slowly because high birth rates (40-50 per thousand) have been offset by almost equally high death rates. At present the richest countries are again in a situation of slow population growth (less than 1% per year) but with much lower birth and death rates (10-20 per thousand).

In the transition from one situation to the other, birth and death rates do not generally move in step. Death rates fall first, and in combination with high birth rates produce a period of very rapid population growth (currently 3-4% per year in sub-Saharan Africa). Only when birth rates fall does the population begin to stabilize. This may not happen for a period of decades, giving time for the population to grow to several limes its original level.

The demographic transition, like economic development, is believed to have its own logic and momentum, but is also partly controllable. The crucial factor, the speed at which birth rates follow the fall in death rates, is believed to depend partly on the fact that greater child survival causes parents to desire less children, but also on deliberate policies of population control. This is the justification for the huge annual expenditure on national and international population control programmes.

1.3 Health development

'Health development' is a convenient name for the process by which populations move from a low level to a high level of health. The nature of these changes shows most clearly in the case of infant deaths. At low levels of health (Infant Mortality Rate of, say, 150 per thousand births), most infant deaths are associated with communicable diseases, particularly diarrhoeal and respiratory conditions.

At intermediate levels the common infectious diseases (many of which have a nutritional and environmental element) begin to give way to a range of (mostly perinatal) conditions which require institutional care. At high levels of health (IMR 10 or less) infant deaths are reduced to a core of congenital conditions and expensively institutionalizable diseases.

For children and young adults the same basic pattern is found, although at lower absolute levels of mortality. Among the infectious conditions, diarrhoeal diseases fall in importance relative to the classic diseases of poverty (such as Tuberculosis) and of the tropics (such as malaria). Maternal mortality becomes important as the counterpart to perinatal conditions, and falls very sharply with the improvement of general health. Accidents are also significant causes of death. Although they have much the same incidence at all levels, in poor countries they tend to be agricultural and in rich ones, industrial or mechanical.

At older ages the gap between countries with low and high general levels of health tends to narrow. The difference in mortality rates for infectious diseases is much the same as at younger ages, but infectious diseases are much less important relative to chronic and degenerative diseases, which show few consistent differences between countries. Hence in all countries the typical diseases of old age are cancer, heart disease, stroke, diabetes, arthritis and mental conditions.

1.4 Interactions

What is the relation between economic, demographic and health development? The simplest answer is a straight causal sequence: economic development provides the extra resources for better nutrition, better housing and sanitation, health services and technology. These lead to lower mortality which triggers off demographic development.

But this answer is too simple. First, some of the relationships involved are circular. For example, unless the demographic transition is completed many of the gains from economic growth will be absorbed by a high rate of population increase. Economic development promotes better health, but better health, by reducing the burden of sickness and uncertainty, facilitates economic development (although this has proved very difficult to demonstrate). The relationship between economic, demographic and health development is a complicated system of interacting variables.

Second, in this system some of the arrows between variables point both ways. For example, some nutritional differences between poor and rich countries make for better health; others, it has been argued, lead to specific 'Western' diseases (such as cancer, heart disease).

2. Production and Health

Economic development is usually accompanied by changes in patterns of production which interact with the health of the population. These production changes include:

- a shift in the balance between manufacturing industry and agriculture
- agricultural production for cash sale rather than subsistence
- rising levels of energy use, associated with new, more capital-intensive technologies.

The most obvious examples of interaction are unfavourable to health, possibly because:

- capital-intensive production shifts the balance of power in favour of employers, who exploit their position

- social controls break down and are not replaced by effective political controls (planning, safety)

- workers are not trained to handle new technologies safely.

Sometimes the damage to health is direct and concrete e.g. Bhopal in 1984 when a release of fumes from a chemical factory killed 2000 people, Chernobyl in 1986 when a partial meltdown of a nuclear reactor spread detectable radiation over most of Europe.

In other cases the effect is more indirect (and disputable). For example, irrigation leads to increased agricultural output but creates a suitable environment for the spread of waterborne diseases such as schistosomiasis (as occurred with the Aswan High Dam); the use of insecticides in agriculture encourages the emergence of resistant strains of malarial mosquito, making malaria more difficult to control.

Possible countermeasures at the national level include more careful impact assessment of new investments, and greater social responsibility among, and control of, individual producers. The cost of these countermeasures also has to be borne in mind.

However, from the economist's point of view development is always potentially favourable to health. It makes resources available that can be used for all the intersectoral actions which can contribute to better health, and also to more and better health services. Yet, for development in a particular case actually to be favourable to health it clearly must not generate any of the dangerous side-effects discussed above. Two more general questions must also be asked:

- how is the income from production distributed among persons and groups?
- how is that income spent (by individuals or society)?

Finally, it should be remembered that the health care industry is itself a form of production. It changes in the same direction as the rest of the economy. That is, it becomes more productive but also more capital-intensive with development, and can generate dangerous side-effects through the ignorance of clients, indifference and exploitation by producers and the failure of effective social control over its activities.

3. Distribution and Health

The proceeds of economic development (resources for health services, other kinds of goods and supplies favourable to health, income in general) are not necessarily equally distributed between persons and groups. Strict equality (equal shares for all) is probably not possible for health services or in general; what is sought is equity, fair shares for all obtained through the avoidance of inequalities which are not necessary or socially acceptable.

The goal of equity is supported on two grounds: as a matter of general social policy, or because it is believed that equitable distribution produces better health results for a given input of resources. This belief is justified because health services, like many forms of production, are subject to diminishing returns. That is, the more resources that are applied to a given population, the less the increase in output (health) obtained from adding one more unit of input.

It is conceivable that development may increase the available resources but may increase inequality to such an extent that large groups of the population are worse off than before, so that there is no improvement in overall health levels or other aspects of welfare. Hence there is a debate between those who believe in the 'trickle down effect' (benefits from development spread themselves naturally throughout the population) and those who believe that special measures are needed to preserve equity during development. For instance, it has been argued that the 'Green Revolution' is an example of unequal development. Based on new varieties of wheat it increased agricultural production and incomes in India (the Punjab) but the gains went to the operators of large and medium-sized farms, leaving the small farmers and landless worse off.

Through an examination of the main aspects of inequality in developing countries some general relationships between development and equity can be seen. (It must be remembered that the degree of equity always varies in pre-industrial countries, depending in particular on the amount of free land available.)

Urbanization - in developing countries towns are usually richer and have better social services and health indicators than rural areas. Development may increase the differential because new industries, high-technology services and administration are located in the towns. On the other hand, larger urban markets often mean high food prices and thus increased farm incomes - an example of the 'trickle down effect'. Development is also accompanied by a growing urban proportion of the population. On balance, the effect of development may be to reduce urban-rural differences, but only after a long period and with great variations between countries.

Sex differentials - in many developing countries, women have less access to formal employment, cash income and public services than men; these differentials are much narrower in developed countries. Health indicators often show the results of women's disadvantages, and in extreme cases women have a lower expectation of life than men (although the opposite is true for most countries). These disadvantages may also impede general health development - for example, the health of children is linked with the level of education of women. As fertility is also linked with female education, sexual inequality may impede demographic development as well. Finally, sexual inequality tends to limit the supply of nurses and some other types of health workers. The broad conclusion is that if development reduces sexual inequalities it is favourable to health.

Factor incomes - one way of looking at people's incomes is in terms of the kind of factor of production that they control (i.e. land, labour or capital), the amount of the factor that they have and its price (rents, wages, interest rates). In market economies, and indirectly even in planned economies, the scarcer the factor, the higher its relative price. Development involves changes in the balance between factors and so far as it results from investment (i.e. an increasing stock of capital), the price of capital should fall and income inequality be diminished. On the other hand, if a technological advance is made which needs capital to put it into effect, it is the existing capitalists who are best placed to take advantage of it, and so push up the rate of profit. Which tendency prevails in the long run? The evidence is hard to evaluate, but two broad indicators suggest that on the whole development evens out factor incomes: the share of the national income going to labour is higher in developed countries, and real interest rates (net of inflation) are lower.

Overall, therefore, economic and social inequalities and hence health differentials (measured, for example, by mortality rates) are probably less in developed than in developing countries. In the UK class differentials in mortality still exist but they may be diminishing. They are certainly less than those demonstrated, for instance, between landowners and landless in Bangladesh.

4. Consumption and Health

4.1 Private consumption patterns

Patterns of consumption tend to vary in a predictable way with income, whether differences are considered between national averages or between income groups in the same country.

A useful way of summarizing these income/consumption relationships is through the economic concept of elasticity of demand. The income elasticity for a particular category of consumption, say food, can be defined roughly as the percentage change in expenditure on that item associated with a 1% change in the consumer's income. (See Chapter 5.) An income elasticity of more than 1 means an item of consumption lakes an increasing share of total expenditure as incomes increase (termed a 'luxury' good). Medical care typically has an income elasticity of more than 1 (say, 1.3), although measurement is complicated by the role of the public sector in the provision of health care.

A typical poor country will spend 2-3% of national income on health care (public and private), whereas the richest countries spend up to 10%. Such statistics raise the question of what share of national income a poor country should devote to health care. WHO has suggested a minimum of 5%; but applying this in practice raises further questions:

- if countries can hold down the price of health service inputs, they can get more health care (in real terms) from a given expenditure. Attention recently has been given to reducing the price of drugs (e.g. through essential drug policies), but the most important input price to health care is the wages and salaries of professional and other health workers. These vary widely between poor countries, being influenced not only by the level of economic development but also by local demand and supply and by competition in the international market

- if expenditure on health care is increased, what other kinds of consumption will be reduced to make this possible, bearing in mind that many of these other categories contribute to health?

From a health perspective, levels and patterns of food consumption are obviously important. Food as a whole tends to have a rather low income elasticity (about 0.7), accounting for perhaps 75% of income in the poorest countries and 15% in the richest. With increasing incomes, there are shifts in the balance between categories of food; basic cereals tend to have the lowest elasticity, while oils and fats and meat have high ones. Further, at higher incomes, food consumption includes an increasing element of refined and pre-cooked foods.

What is the significance of this for health? From one point of view, these trends are positive: starting from a diet which is largely carbohydrate, it seems that with increasing incomes consumers naturally move to one with a better balance in terms of proteins and vitamins. It has been argued that nutritional improvement (in quantity and quality) explains much of the improvement in health in industrial countries in the 18th and 19th centuries.

On the other hand, it can be argued that the changes in diet that are favourable to health at low levels of income may become harmful at higher levels. Among the factors blamed for various health problems in rich countries are excessive fats, salt and additives, and too little fibre. Further, it can be argued that considerations of prestige and imitation of foreign patterns encourage the spread of 'rich country' dietary patterns to countries at quite low levels of income. Hence the concept of 'Western' diseases.

4.2 Public consumption patterns

All countries have a public sector - i.e. some services are provided by agencies of government, central or local, rather than by private suppliers - and only the most extreme market economists argue that public provision of some functions is unnecessary. Nevertheless the share of the public sector in the economy varies widely. Has this any connection with levels of development on the one hand and with health on the other?

It might appear that regardless of level of development, countries are free to make a political choice between a 'socialist' pattern (in which all production, or at least the commanding heights, is under public control), a 'market' pattern (in which public production is minimal), or any intermediate stage of 'mixed economy'. But the actual situation reflects two conflicting trends. On the one hand, poor countries which aim at economic development see great advantages in a socialist approach - the possibility of coherent planning, equitable sharing of the results of development and continuity of policy. On the other hand, it is more difficult in the poorest countries for government actually to control the economy. Much of the economy may consist of small-scale agriculture and industry, which is always hard to control; tax systems have to be kept simple; communication difficulties limit government effectiveness and so on. Many of the poorest countries are nominally socialist, but typically only 15-20% of the national income comes under government control, against 40% in even non-socialist developed countries. Hence in many nominally socialist countries government does not in practice control all production, but concentrates on industries crucial to the development plan, plus provision of basic social services (e.g. India). Alternatively, or in addition, functions are pushed down to the local level for administration and financing (e.g. China).

This pattern of ownership applies to health services as much as other forms of consumption: in most developing countries, a substantial share of health care is provided privately, or at a local level. Is this bad? It is very hard to show statistically any consistent difference in health indicators between countries with 'socialist' and 'private' systems of health care provision. Perhaps we need to distinguish between the many kinds of preventive and promotive work, which are unlikely to be provided effectively on a private basis, and other services where the difference in efficiency between public and private may not be great.