Health Care Expenditure, Health Outcomes, and Economic Growth ...

2015-4521 Unified Journal of Economics and International Finance

Vol 2(1) pp.001- 010 October, 2016. http://www.unifiedjournals.org/ujeif Copyright © 2016 Unified Journals

Original Research Article

Health Care Expenditure, Health Outcomes, and Economic Growth Nexus in Nigeria: A Toda – Yamamoto Causality Approach Anne C. MADUKA1, Chekwube V. MADICHIE 2* and Chukwunonso S. EKESIOBI1 1Department

of Economics, Chukwuemeka Odumegwu Ojukwu University, Igbariam Campus, Nigeria. 2Department

of Economics, Nnamdi Azikiwe University, Awka, Nigeria.

Accepted 13th September, 2016 ABSTRACT Conventional wisdom holds that health is central to human general well-being, as well as a prerequisite for increased productivity, and overall economic growth and development of an economy. This explains why governments across the globe are making enormous efforts to achieve good health for all and Nigeria is no exception. Regrettably, despite government’s efforts to improve the health situation of the citizens through massive health care expenditure, the Nigerian health outcomes (such as life expectancy and mortality rate) are still considered one of the poorest and most miserable in the world. Thus, the study follows a causality approach to examining the relationship among government health expenditure, health outcomes, and economic growth in Nigeria during the period 1970 – 2013. Unlike previous studies that relied on the traditional Granger causality test for such purpose, the study utilizes the approach provided by Toda and Yamamoto (1995) for causality analysis which is based on a modified WALD statistic (χ2 distribution). The order of integration of variables was determined using ADF and KPSS while cointegration test was carried out using the Johansen approach. The result of the Johansen cointegration test shows that despite the varying order of integration of variables of the study, they still have longrun equilibrium relationship. The TY causality test revealed that government health expenditures do not directly influence economic growth, but indirectly through health outcomes such as mortality rate and life expectancy. The study therefore concludes that government should always consider health outcomes (mortality rate and life expectancy) whenever policy actions targeted at health care expenditures are meant to drive economic growth. KEYWORDS: Health Care Expenditure, Economic Growth, Toda-Yamamoto Causality

*Corresponding Author’s E-mail: [email protected]

Unif. J. Econ. Int. Finan.

Chekwube et al.,

1. INTRODUCTION

hand, a sustainable growth and development of an economy can offer the people the access to a better nutrition and disease treatment opportunities. This explains why governments across the globe are making frantic efforts to achieve good health for all. Thus, following the recommendations of the United Nations (UN) that countries should budget at least 8 to 10 percent of their GDP as a benchmark expenditure on health, the Nigerian government has been making efforts to increase its expenditure on health. The government tried to meet up with the benchmark by increasing the total expenditure on health from N84.46bn in 1981 to N134.12bn in 1986. By 1987, it dropped to N41.31bn, and skyrocketed to N575.30bn in 1989. In 2002, the total expenditure on health has risen to N40, 621.42bn, and dropped to N33,267.98bn in 2003, and later appreciated to N104,810.08bn in 2010. Between 2011 and 2014, the total expenditure rose to N113, 766.30bn, in 2011, N122, 722.60bn in 2012, N131,678.87bn in 2013 and N140,635.10bn in 2014. A cursory look at these figures reveals that health as an important facilitator of economic growth has attracted the attention of the government, and has as well received a fair share of the country’s gross domestic product over these years.

Conventional wisdom holds that health is central to human general well-being, as well as a prerequisite for increased productivity, and overall economic growth and development of an economy. Health is also a driving force upon which other human capitals such as education, skills, etc, rely on. Oni (2014) posits that healthy workers lose less time from work and are more productive when working. According to (WHO, 2005), good health has the consequence of widespread economic growth, and an escape of ill – health traps in poverty. As pointed out by Barro (1996), health is a capital productive asset and an engine of growth. Therefore, it is rather instructive to appreciate how dramatic the improvements in World’s Health have been over the past decades. In 1950, some 280 out of every 1000 children in developing countries died before their fifth birthday. By the year 2000, the number had reduced to 126 per 1000 in low-income countries, 39 per 1000 in middle-income countries, and 6 per 1000 in high-income countries (Todaro and Smith, 2006). This is the result of total eradication of some important killer diseases such as small pox as well as some major childhood illnesses such as rubella and polio, through the use of vaccines. Following the reports of the World Health Organization (2005), about fifty percent of economic growth differentials between developed and developing nations are attributed to ill-health, and low life expectancy. This is because developed countries spend higher proportion of their Gross Domestic Products (GDP) in providing health care services to their citizens, while some of the developing countries exhibit great variability in health care expenditure. The reports also show that there exists very great variability in the performance of health system at each income level, and in each country. According to the same report, both developed and developing countries were ranked according to the proportion of income spent on health care. While Singapore was ranked 6th, Costa Rica was 36th with Colombia, Chile, and Morocco as 22nd, 23rd and 29th respectively. However, it should be noted that all of these developing countries ranked higher than the United States. This is an indication that much can be done with relatively modest income. Economic theory has established a positive mutual interaction between the health of a worker and his productivity. First, it is widely known that a healthy worker is more fit both physically and mentally, to contribute to production as well as increase productivity more than a sick worker. On the other

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Regrettably, despite these government efforts to improve the health situation of the citizens through massive health care expenditure, the Nigerian health outcomes (such as life expectancy and mortality rate) are still considered one of the poorest and most miserable in the World. Based on the foregoing problems, the study seeks to address the following questions: (1) is there any relationship between government health expenditure and economic growth in Nigeria? (2) Does health care expenditure influence economic growth through its impact on mortality rate and life expectancy? Providing answers to these questions will allow us to establish the causal link between health care expenditure, health outcomes, and economic growth in Nigeria. Thus, the paper uses a Toda – Yamamoto causality approach to accomplish its objectives. 2. LITERATURE REVIEW 2.1 Theoretical Literature Health as a human capital affects growth directly by impacting on labour productivity and the economic burden of illness. There is a correlation between health condition and the productivity of a nation. Studies have shown that healthier people earn higher wages and therefore achieve increased productivity. Statistical methods have also shown that a large part of the effect

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Chekwube et al.,

of health on rising earning is due to productivity difference (Todaro and Smith, 2006). Evidence has shown that there exists a reverse causality between higher wages and better health. This is because higher productivity of healthier workers allows them to get better paying jobs, thereby having enough money to purchase things to maintain their health. Bloom and Canning (2009, 2012) opined that healthy population tends to have higher productivity due to their greater physical energy and alertness. According to them, healthier individuals affect the economy in four ways: (1) they are likely to be more productive and so earn higher incomes; (b) they may spend more time in the labour force as less healthy people take sick leave often and retire early; (c) they may invest more in their own education, which will increase their productivity; (d) they may save more in anticipation of a longer life after retirement. Therefore, the level of productivity and growth in an economy will be greatly hampered by illhealth or prevalence of diseases.

the public sector (Ilori and Ajiboye, 2015) 2.3 Empirical Evidence

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Adolph Wagner (1835 – 1917), a German economist based his law of increasing state activities on German historical facts. According to him, there are inherent tendencies for the activities of different layers of government (such as central, state and local government to increase both extensively and intensively). This means that there is a functional relationship between the growth of an economy and the government activities so that the government sector grows faster than the economy. In other words, Wagner argued that a functional, cause and effect relationship exists between the growth of an economy and the relative growth of public sector.

Several works have been done recently on impact of Public Health Expenditure on Economic Growth in Nigeria and outside Nigeria. Prominent among them is the work by Aguyo – Rico and Iris (2010). The study examined the impact of health on economic growth for 13 European countries, 12 African Countries, 16 American countries and 11 Asian Countries over a period 1970 – 80 and 1980 – 90 using ordinary least square (OLS) Method of Analysis. The study found that health capital has a significant effect on economic growth, especially with a variable that captures all the determinants of health. Furthermore, Barro (1991) and Barro and Sala-I-Martins (1992), Knowles and Owen (1995) investigated the positive effect of health on economic development. They found evidence of a strong effect of health in explaining income per capita difference. Other studies such as Greiner (2005), Agenor (2007), Strauss and Thomas (1998) and Martins (2005) conducted for other countries all emphasized that health expenditure is positively related to economic growth. Gupta and Mitra (2010) conducted a study from 15 States in India for the period 1977/78, 1993/94 and 1999/2000 and found that per capita public health expenditure positively influence health status that poverty declines with better health and that growth and health have a positive two-way relationship. Similarly, Bloom et al (2004) estimated a production function of aggregate economic growth as a function of capital stock, labour and human capital. Their main results show that health has positive, statistically significant effect on economic growth. However, they did not consider how health is created.

John Maynard Keynes, in his theory believes that expenditure can contribute positively to economic growth; therefore, an increase in government consumption is likely to lead to an increase in employment, profitability and investment through multiplier effects on aggregate demand. As a result, government expenditure augments aggregate demand which provokes an increased output depending on expenditure multiplier. Keynes postulates that: (1) the extension of the functions of the state leads to an increase in public expenditure on administration and regulation of the economy; (2) the development of modern industrial society would give rise to increasing political pressure for social progress and call for increased allowance for social consideration; (3) the rise in public expenditure will bring about more than proportional increase in the national income (income elastic wart) and thus results in a relative expansion of

In Nigeria, Olaniyi and Adams (2000) did a descriptive analysis of the adequacy of the levels and composition of public expenditure and conclude that education and health expenditures have faced lesser cuts than external debt services and defence, but allocations to education and health sectors are inadequate in relation to the benchmark and the performance of other countries. Similarly, Chete and Adeoye (2002) studied the empirical mechanics through which human capital influences economic growth in Nigeria. They attempted to achieve this objective using Vector Autoregressive analysis (VAR) and ordinary least square to capture these influences. They concluded that there is an unanticipated positive impact of human capital on growth which the various Nigerian governments have appreciated by expanding educational infrastructure across the country, but they were quick to point out that the real capital expenditure on education and

2.2 Relevant Theory



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health have been rather low. Odusola (1998) studied the nexus between investment in human capital and growth of economic activities. Using Nigerian data, he estimated three models. It was discovered from the health expenditure on economic growth over the period 1985 – 2009. The authors suggested that if funds are properly channeled and appropriately expended to both the recurrent and capital project in health, the existence of a positive relationship between economic growth and health will be more widened. Bakare and Sanni (2011) argued along the same line when they used ordinary least square (OLS) multiple regression for annual time series data for Nigeria covering 1974 – 2008. The results show a significant and positive relationship between health expenditure and economic growth. In a likewise manner, Odior (2011) conducted a study on the relationship between health and economic growth by using an integrated sequential dynamic computable general equilibrium (CGE) model over the period 2004 – 2015 to investigate the impact of government expenditure on health on economic growth. The findings suggest that the re-allocation of government expenditure on health sector is significant in explaining economic growth in Nigeria.

result of the models that human capital formation is a crucial determinant of the growth process. Furthermore, Adeniyi and Abiodun (2011) used the ordinary least square (OLS) to examine the impact of celebrated Toda – Yamamoto causality approach for the analysis. Toda – Yamamoto (1995) tries to mitigate the problem of specification bias and spurious regression exhibited by ordinary Granger causality by basing its analysis on augmented VAR modeling and introducing a modified Wald test statistic (MWALD). This procedure is superior to the traditional Granger causality tests since it does not require pretesting for the cointegrating properties of the system and thus, avoids the potential bias associated with unit roots and cointegration tests as it can be applied regardless of whether a series is 1(0), 1(1) or 1(2), non-cointegrated of an arbitrary order.

Finally, Dauda (2011) examined the relationship between health expenditure and economic growth for Nigeria spanning from 1970 – 2009 by employing descriptive statistics, Johansen Cointegration and error correction model (ECM). The study suggests that health expenditure has positive and statistically significant impact on economic growth. In summary, all the studies on the nexus between the health expenditure and economic growth reviewed suggest positive and significant effect of health care expenditure on economic growth. The extent of the impact however, depends on the magnitude of the public budgetary allocation to the health sector. It is revealed from the review that developed nations have stronger robust impact than the developing nations, which implies that the amount of fund allocated to the health sector by the developing countries does not meet the benchmark and standard set by W.H.O. Moreover, it was discovered in the course of the empirical review that none of the studies had followed a causality approach to the study of the relationship between government health expenditure and economic growth especially in the Nigerian context. Determining the causal relationship among the government health expenditure, health outcomes and economic growth in Nigeria will allow for the provision a valid as well as specific policy recommendation. It is by filling this research gap that this study intends to make its contribution to knowledge by employing the much

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3. METHODOLOGY 3.1 Theoretical Framework and the Model The growth model used for the study is the Mankiw, Romer and Weil (1992). The model resembles the Solow – Swan model in the sense that it assumes constant return to scale, but it differs from the later because of the changes physical and human capital accumulation bring to output per worker. Hence, MRW (1992) is suitable for the study because of the importance of human capital in bringing about tremendous economic growth. Also, the MRW model implies that the income share alone may not be an accurate measure of the overall importance of capital. According to this model, economic growth is a function of physical capital (K), human capital (H) and the number of workers (L). Therefore, the model is: Y= A Kα HβL1-αβ -----------------------------------------------1 Where A is the index of technical change that varies overtime but for this moment held constant, K is the capital stock, L is the labour supply and H is the stock of human capital. It is important to point out here that the parameters α and β are assumed to lie between 0 and 1 and that (α + β) < 1, implying that there are decreasing returns to all capital. Modifying the model in line with the aim of the study, it becomes: GDP = f(GCF, GEH, LAB, MTR, LEP) -------------------------2 The econometric form of the model is: GDP = β0 + β1GCF + β2GEH +β3LAB +β4MTR +β5LEP + μt ------------ 3 The natural logarithmic form is: LGDP = β0 + β1LGCF + β2LGEH + β3LLAB + β4MTR + β5LEP + μt ---------4 Where β0 = constant intercept; β1, β2, β3, β4 and β5 are the parameter estimates of the variables; μt is error term.



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3.2 Data and Method of Analysis

health outcomes, and economic growth in Nigeria. In a word, cointegration means longrun relationship between two or more variables. The Johansen cointegration test is based on estimating the following vector autoregressive (VAR) model: Zt = A1Zt-1 + - - - - + ApZt-p + βYt + µt -----------------------------------------5

The study employs annual data from 1981 – 2014 to examine the causal relationship among government health expenditure, health outcomes, and economic growth in Nigeria. Data for the study were obtained from the World Development Indicators (WDI) and Central Bank of Nigeria (CBN) statistical bulletin of various issues. We use Johansen cointegration approach and the TodaYamamoto causality approach to determine the relationship between government health expenditure,

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Where: Zt is a k-vector of non-stationary variables; Yt is a d-vector of deterministic variables; and µt is a vector of innovations. This can be rewritten as:

Where In the Granger’s representation theorem, if the coefficient matrix п has reduced rank r