Transcript of an Economic Forum - Health, Wealth, and Welfare

April 15, 2004

Health, Wealth, and Welfare
International Monetary Fund
Washington, DC
Thursday, April 15, 2004


Abdoulaye Bio-Tchané (Moderator)
African Department

David Canning
Professor of Economics and International Health
Harvard University

Markus Haacker
Senior Economist
United Nations Economic Commission for Africa

Dean Jamison
U.S. National Institutes of Health

MR. BIO-TCHANE: -- other people are coming. Okay. Let's start and they will join us.

Guests, colleagues from the Fund, the Bank, panelists, I'd like to welcome you all to today's Economic Forum on a crucial area of concern: the link between health, wealth, and welfare.

The urgency of these concerns becomes clear when we consider the rapid improvement in living standards that has been achieved in many countries in recent years, and at the same time the threat to life expectancies in Africa and elsewhere posed by the threat of the HIV/AIDS epidemic. This epidemic has already imposed an immense human toll and undermines progress toward raising economic growth and reducing poverty in many developing countries, particularly in Africa.

One most often hears that the causal link between health and income has gone from income to health, that longer life expectancies, for example, are the result of income and economic growth. One theme of today's discussion is that the causality also runs in the other direction, namely, that better health indicators can contribute to higher economic growth and rising incomes.

In this respect, better health becomes a tool of self-sustaining economic growth. The causal link between better health and increased incomes magnifies the terrible potential impact of the HIV/AIDS epidemic. More than 40 million people worldwide are living with HIV/AIDS, and in 2002 alone, some 3 million people died of this disease. The epidemic is of particular concern to Africa, with 70 percent of the worldwide cases, 30 million people, in Africa.

In certain countries, the disease has taken on catastrophic proportions. For example, in Botswana, more than 35 percent of the working-age population lives with HIV/AIDS. Clearly, the epidemic is taking an immense human toll.

In addition, it is fraying the social fabric in many countries, undermining public finances, and diverting attention from other pressing development needs. On top of all, as our panelists will note, the HIV/AIDS crisis further undermines efforts to raise incomes and reduce poverty in these countries. The growing global income inequality will be further exacerbated by this trend.

I would like to say a brief word on the IMF's role in health issues and HIV/AIDS.

As most of you probably know, the IMF is not directly involved in health sector issues. However, the Fund within its mandate responds to health sector issues and the HIV/AIDS epidemic in a number of ways and works very closely toward these ends with other international organizations, with civil society organizations, including churches. The mere fact that today we are holding this forum here today is a testimony to our interest in this subject.

The IMF, of course, provides financial support to member countries, including through the Poverty Reduction and Growth Facility, the PRGF, for low-income countries. PRGF programs are framed by Poverty Reduction Strategy Papers, the PRSPs, which are country-owned documents that outline a country's integrated approach to and objectives for poverty reduction. In this context, support goes to boosting health spending and improved health care, including in the fight against HIV/AIDS, and we have seen in many PRGF countries, particularly in the HIPC-financed countries, that social expenditures, particularly geared toward increasing health expenditures, have increased.

The IMF also provides substantial technical assistance to countries, a key area in the improvement of public expenditure management systems which helps to ensure that public spending, including in the health sector, is used efficiently and allocated in a transparent manner to intended purposes. In addition, Fund staff now do a great deal of analytical and research work that informs our policy advice to member countries. Specific examples include the macroeconomic and fiscal consequences of HIV/AIDS. And I'm happy to have here today Markus, who is one of the African Department staff working with ECA on HIV issues.

I would like to underline another point. One of the Millennium Development Goals, MDGs, is to have halted and begun to reverse by 2015 the spread of HIV/AIDS. At the Fund we see progress toward the MDGs as a central objective that all of us must strive to achieve. However, a somber warning is needed. At the current rate of progress, the goal to reverse the spread of HIV/AIDS will not be achieved by 2015 unless more concerted efforts is undertaken by non-member countries and the international community.

The Fund will continue to voice on the international stage the need for the international community to commit the resources necessary to help countries combat HIV/AIDS and achieve the MDGs' goal.

Thus, at the Fund--and we are just a small part of a broad international effort involving first and foremost country governments and citizens, but also international organizations, nongovernmental organizations, and the private sector--we hope to make a contribution to strengthening health services and bolstering the fight against HIV/AIDS to eventually reverse the progress of this horrible epidemic. We see this as essential to raising income and standards of living. Clearly, the issues before us today are immensely serious and profound important for the future, in particular for Africa.

We have assembled here today for our discussion three experts in this field: Professor Canning, Professor Jamison, and Mr. Haacker. Let us hear from them, starting with Mr. Canning. You have the floor.

See Mr. Canning's presentation (439 kb pdf file)

MR. CANNING: Thank you.

The title of the talk today is "Health, Wealth, and Welfare." And I'm going to talk mainly about the link between health and wealth, so the role of health as an investment good, as a form of human capital.

I think, though, as well, we all recognize the welfare benefits of health. People like to be healthy. And I think recent work in this area has emphasized just how large those direct welfare benefits are. And I think the other speakers today will look at that issue.

And, finally, perhaps the most important issue is if we agree that health is a good investment, how do we go about improving health? What interventions, what mechanisms do we have that are cost-effective ways of improving the health of particularly people in the poorer countries?

There's a very strong association empirically between health and income levels. This is just a graph of the relationship between income per capita across the world and life expectancy. And as you can see, there's some leveling off at high levels of income, but life expectancy and high income go hand in hand. Another way of saying this, essentially the same data, is that this is a link between income per capita and infant mortality.

And essentially the issue is, given this high degree of correlation, what can we say about causality? And there is essentially a view that health and health improvement has to wait until certain levels of income have been achieved, that health is a consumption good, and that economic growth and poverty reduction are necessary prerequisites for achieving population health.

And I think that what we'd like to argue today is that that's not quite right, that we do have mechanisms for achieving population health very cost effectively, even in the poorest countries, and that those health improvements can lead to economic growth and poverty reduction.

So we have this correlation between health and income, and we have to think about the directional causality. And what I want to do is talk a little bit about the evidence base for that.

But in terms of the way we think about it, I think that the traditional view, certainly the view ten years ago that I held probably as a development economist, was that there was a strong link between income and capital accumulation, so that the accumulation of physical and human capital, particularly human capital in the form of education, were totally interrelated, and there was a positive feedback between having higher incomes, accumulating more physical and human capital, which would feed back into further income growth.

And essentially if you look at this diagram, the role of the development economist was to work on the two arrows at the bottom. How do we achieve higher rates of investment in physical and human capital? And how do we turn those investments into higher productivity? And that to the extent that health was involved in this, it was seen as a consequence of this process.

So I think there's a well-known paper by Lant Pritchett and Larry Summers arguing that wealthier is healthier, and that health is essentially a consequence of improvements in income, and arguing that improvements in income are a good method of improving population health.

This has changed over the last ten years, and it has essentially changed for two reasons. And it's essentially based on evidence. We have a great deal of new evidence that healthier individuals do better economically.

I tell my mother what I do for a living, and I say one of the things I work on, one of the ideas I have is that healthier people are happier and more productive. And she's slightly surprised that this is considered such a novel notion. I think conceptually it's thoroughly obvious.

I think the new evidence that we have and what is surprising is how strong this link is. I don't think anyone would argue that healthier people do better economically. But this is actually--the evidence is there's a very powerful link.

As well as this individual evidence, we have evidence from countries that countries with healthier populations have higher rates of economic growth. And so putting these two pieces of evidence together, we can both at the micro and at the macro level confirm that health seems to be an important component of--plays an important role in generating economic development.

If you want to think about the mechanisms, the reason why health is so important, the three reasons we think that are important for adults are that healthy adults are more likely to be in the workforce. One of the prime reasons for early retirement is ill health, so that by generating a healthier population, we're going to have more people working.

There is also now a very large body of evidence arguing that healthier adults are more productive. They earn higher wages, and they do better. That evidence base is somewhat indirect. We see health improvements, and we see that these health improvements lead adults to do better.

There is always, though, even at the micro level, a problem of causality. Is it really the health causing the income improvement? Or is it the income improvement that is causing the health? And separating out that link I think is always going to be technically very, very difficult.

We can do it statistically, but that's not always completely convincing, though I think the evidence is very strong. But I think very recently we have had some studies based on randomized controlled trials, particularly I'm thinking of a study in Indonesia, where iron supplementation has led to reduced levels of anemia. So this type of trial, because it's randomized with a placebo, it's very hard to argue that it's not a real effect.

What we see in this trial is that not only do we get large health improvements from this simple health intervention, but the people who get the health improvement do much better. They do work longer hours in some cases. And in other cases, we see their earnings going up. So we've got a large evidence base at the macro level.

The other sector in which this is important is that as well as being healthier, a longer life span, a longer prospective life span, can lead people to save more for retirement. And there is increasing evidence, again, both at the micro and macro level, that people who expect to live longer save more. This, of course, though, is highly conditional on the institutions in place, and poorer countries have very strong family transfer systems, which lessen the need for saving. And in developed countries, there are often large state sector transfer systems which lessen the need for saving.

In terms of investment, though, I think it's probably important to think about investing in children. And here we have evidence that health improvements lead to better schooling outcomes and better cognition in terms of test scores for children.

To the extent that it improves adult wages because children are healthier and improves educational outcomes, I think investing in the health of children can be seen as very important.

At a more aggregate level, there's also an important effect of improved child health and lower child mortality in the form of reduced fertility. I think an important effect that's going on in developing countries is that when child mortality falls and this leads to reduced fertility, we see a rapid change in the age structure. Reduced numbers of children can lead to an increase in the working-age population and a demographic dividend which can give rise to a period of very rapid economic growth.

So these are some of the direct benefits of health and some of the more indirect benefits of health, and the indirect, I think, can also be very, very large.

If we look at the estimates of the effect of health on wages, what we see is estimates of the effect of improvements in health, in childhood health investments, that lead to increased height. Illness in childhood often leads to stunting. It leads to periods of low appetite and low consumption of food and to stunted adults. And this stunting in adulthood is associated with higher levels of illness and morbidity.

Now, it's not height in general. Height in general isn't that closely associated with higher wages. But height induced by health inputs is highly linked to higher wages in adults, and the estimates we see here for an extra centimeter of height induced by health investments range from about a 4- to 8-percent increase in wage levels.

In the course of development, for developed countries we have seen increases in height on the order of 10 centimeters. That implies that these health effects add up to perhaps 40- to 80-percent increases in wages. If you compare this to the sort of estimates that we get for education, this implies that the benefits of moving to a healthier population in the aggregate are roughly the same order of magnitude as for moving to zero education levels to the level of schooling we see in developed countries. So it says, if these estimates are correct, health is about as important as education as an explanation for why some countries are rich and some countries are poor.

So that's a very big effect. And that, I would emphasize, is just the direct productivity effect of better health, and I think they're the more indirect effects that we talked about.

One thing I would mention, though, is that we find these very large effects in developing countries. The effects in developed countries are much smaller. We get similar effects in developed countries, but they add up to perhaps 1 or 2 percent. This is actually quite different from the education literature, where the education effects seem to be roughly comparable in the developing and developed countries. Here it seems to be the case that the big returns to health are in the developing world.

There has also been a large literature on the effect of health on gross domestic product and a large body of evidence arguing that health measures, such as life expectancy, have effects on subsequent growth rates of GDP and GDP per capita. And if you take a survey of these types of papers, the effects found are fairly large. A year of extra life expectancy appears to raise the steady-state level of income per capita by about 4 percent.

And if you look at the life expectancy differentials across the world, perhaps in some of the poorest African countries--Sierra Leone, for example, with life expectancy in the 30s as compared to in the 70s for most developed countries--that's a very big effect.

Actually, if you calibrate this against the micro evidence, it's roughly the same order of magnitude. The macro and the micro evidence seem to be telling a consistent story of large impacts of health on individual earnings and similar large impacts of health on the level of steady-state GDP for countries.

If you look at the behavior of savings, I think one of the mysteries of the East Asian miracle has been the huge boom in savings. The work, for example, by people like Alwyn Young has emphasized the effect of savings and physical capital and the development of human capital in the form of education in the East Asian miracle. And I think one potential explanation of the savings boom in East Asia is the increase in longevity. We have a cohort who for the first time are expecting to have long lives. They're saving for retirement. Particularly in East Asia, there was an absence of state transfer systems.

Now, I think in aging populations, as this cohort ages, there is an issue about savings falling off. But when this cohort is in its prime working life, this large cohort, what we see is large savings for retirement and not yet the dissaving of the elderly. So it looks like increases in longevity can raise national savings rates, though this effect may be temporary. Whenever these longer-lived populations actually become old, the savings effect can be offset.

Another indirect effect is the demographic gift or demographic dividend. Improvements in health tend to be concentrated initially in infant mortality. So what we see, particularly this is happening in Africa at the moment, are very large youth dependency rates. The falloff in infant mortality leads to a large cohort of children.

The reduction in infant mortality, though, eventually has a fertility effect. There are other factors that affect fertility, particularly female education levels, and I think simple diffusion of concepts of optimal family size. But when fertility falls, this large cohort of children works its way through the age structure, and that can have very, very large macroeconomic consequences. And while this large cohort of baby boomers is in the working-age group, I think it can significantly boost economic growth.

If you look at Africa--and this chart along the bottom has the age groups going from 0 to 40 up to 80-plus--going into the picture we have years, and about halfway through is where we are around 2004, 2005 on the graph. And this actually projects into the future out to 2025. And what we can see in the graph is, as we move into the future, rising numbers of children in Africa and rising youth dependency rates, some leveling off around 2025 in that rise as fertility declines.

But Africa, in particular at the moment, has a problem of a large youth dependency, which puts stress on the social sectors, social provision of education and health.

If you look at East Asia in consequence, it's much further into the demographic transition. After around 1970, 1975, the absolute numbers of children were declining, and we see this ridge of the baby-boom population working its way through the age structure. And, in particular, the very rapid rates of economic growth in Asia between 1970 and 2000 and what's now going on in China can be attributed, at least in part--we think perhaps a third of the growth can be attributed to this demographic change which comes primarily from the health improvements followed by the fertility reduction. So this change in age structure can have a profound effect on economies.

Now, when we argue that health is an investment good and can lead to higher income, I think we are completely in agreement with the view that income also generates health, that health inputs cost money and a richer society can afford those investments which generate health. And I say as well as the direct welfare effects, we have these economic growth/poverty reduction effects. And I'm convinced that economic growth and poverty reduction are the only way in the long run for these economies and welfare to improve.

But this mutual reinforcement leads to the prospect of both virtuous circles and vicious spirals; that as health improvements, investments in education, and economic growth go hand in hand and complement each other, the current AIDS crisis in Africa is potentially going to have a very, very negative consequence. And I think we're not seeing this directly at the moment, but in the longer run, the reduction in investment in education, the poor health particularly of the orphans that are being created by the high mortality rates among adults could well have very negative effects in Africa.

So I think this is the new paradigm that we're trying to discuss, which is that the feedbacks from health into income and into the human and physical capital creation have to be taken into account. I don't think anyone would argue with the existence of these arrows. I think what we're proposing is that these arrows are actually very, very large. They're not arrows that can be ignored in the process of development. If you're thinking about development, you have to take in these feedbacks between income and health in a very serious way.

And this leads to the prospect of health-led development. One thing is, when people talk about human capital, at the moment they often mean purely education. I think we'd like to widen that concept so when people talk about human capital, they include health as a fundamental type of human capital.

We have these direct welfare benefits, which the other speakers today will also discuss. However, if we're going to argue for health-led development, it's important that we have cost-effective interventions.

These large benefits don't in themselves give an argument for investing in health. We have to have cost-effective ways of creating health in order to justify those investments. In particular, I think we have to compare intersectorially the benefits of health investments relative to other investments. And I think perhaps Dean Jamison in particular will talk more about this.

Thank you very much.


MR. BIO-TCHANE: Thank you, Professor Canning. We'll reserve our questions until later.

I'll ask maybe, Markus, do you want to speak now?

See Mr. Haacker's presentation (30 kb pdf file)

MR. HAACKER: The work I'm going to talk about today is coming out of the work that takes place in various international organizations on the broad impact of HIV and formulating the policy response. In my case, that has been the IMF and the United Nations, but that work takes place in cooperation with other international organizations like here at the World Bank or, for example, UNAIDS.

Looking at the economic impacts of HIV, what is remarkable is how diverse the impacts are through which HIV does affect the economy, does affect economic performance and economic development.

If I look at various social institutions, at individuals, at households, at companies, at the public services, at government finance, I find that HIV does have a strong effect on each of these social institutions in countries with severe HIV epidemics, and they have, again, a significant impact on macroeconomic performance and economic development. I want to briefly talk about some examples on how HIV does affect these social institutions and how that in turn affects the macro economy.

For example, for individuals we know that HIV does very substantially increase personal and economic risks through increased mortality, which for adults increases by up to tenfold, say, from 0.3 percent per year to 3 percent per year in some of the countries we look at. And HIV also results in losses in living standards for individuals affected. For households affected, we have data that income starts falling for workers affected by HIV well before they eventually are forced into retirement. The loss of an income earner for a family means a substantial loss of family income. At the same time, the demand for health services for countries to care for those who fall sick increases, and families have to reduce their consumption in other areas to make up for this. The effect is particularly severe for the most vulnerable households because richer households can cushion off some of the adverse effects of HIV, drawing down on their assets, and poorer households obviously do not have that opportunity.

On companies, we have several studies, many from South Africa but also from some other countries, showing how HIV does affect the workforce, how HIV does affect production costs. There was a study by Metropolitan Life a couple of years ago indicating that for the formal sector, including fringe benefits, personal costs may increase by 10 to 15 percent until 2005 and 2010. Other studies looking at the cost of HIV on the level of production see that HIV does result in increased absenteeism, reduced productivity for employees, and some of this will be borne by the employees through lower pay.

Looking at governments, HIV does have a substantial effect on the public services through losses of employees. In countries with severe epidemics, say with an HIV prevalence rate, this means that about 25 percent of public servants may die before they reach senior positions within 10 years. For example, in the context of the IMF, that would mean that one-quarter of the staff would be dead before the time they reach the level of a Deputy Division Chief. And that, of course, has a substantial effect on how these institutions, how governments function. That's a huge loss of human capital, and that will affect policy formulation. That will affect the efficiency of public services substantially.

On the other side, HIV does affect the demand for government services, and governments are struggling to meet this increased demand. Health services are one part strong example.

What implications does this have for economic risk, for economic welfare? The link between risk and welfare runs in several directions. For example, as individual risk increases and the time horizons of individuals decline, we expect that this will eventually result in a decline in human capital, both directly as individuals die and cannot contribute to production, to public services, before they attain their most productive age, also indirectly as increased mortality is associated with a decline in the demand for education.

The impact from the increase in individual risk on the economy also goes the other way. The macroeconomic impacts through the response of economic institutions, of companies, of governments in turn increases individual risk. Just naming two examples, on the level of companies, we see that the costs of fringe benefits do increase substantially, and most clearly the costs of death-related benefits which can be on the order of magnitude of two or even four times annual salary for a deceased employee. That means that if 2 or 3 percent of the employees in a given year die, the overall personnel costs can rise by 10 percent, and that could take companies out of business. And we see a response to reduce these benefits.

There's been a substantial shift in South Africa over the last year, moving from defined benefits schemes whereby all employees, regardless of tenure, will receive certain specified benefits, for example, certain--the example I just used, two times annual salary, and the companies who continue--the share of the companies who continue to provide these kinds of benefits has decreased very substantially in South Africa. And instead these schemes were replaced by schemes whereby the benefits in case of death or medical retirement are just drawn from the contributions of the employees to a provident fund, which means that families who lose members early in their productive life due to AIDS will receive much lower payouts.

Looking at the link between individual risk and welfare, there are various measures assessing the broad impacts of HIV going beyond the impact on economic growth, per capita income. For those macroeconomists who have addressed the economic impact of HIV, it's a kind of common knowledge that per capita income is not a good indicator. I read in a World Bank study it's not a good indicator because it does not include the welfare of those who die, but it is--so it is a kind of common language among economists, and this is why we continue to use it.

Some broader assessments of the impact of increased mortality, individual risk, and welfare look at life expectancy. One indicator which includes measures like per capita income, education, and life expectancy is the human development indicator. What this table shows is the achievements in human development as measured by this human development indicator over the last 50 years. And we see the substantial increases between 1950 and 1975, but if we then look at the developments between '75 and 2001, we see that owing to HIV, human development in many countries has improved only marginally.

Looking at--I think that's South--yes, looking at South Africa, for example, South Africa experienced a substantial increase from about 0.5 to 0.65 between 1950 and 1975; and whereas the human development index would have increases to 0.77, it only increased very meagerly to 0.68 over the last 25 years. And that is largely a result of the declines in life expectancy, which went down to levels that were previously achieved around--well, in the 1950s.

Is this readable? Another way of assessing the impact of HIV on economic welfare is trying to evaluate the welfare losses due to increased mortality directly, and the way these studies work is the following: I think yesterday the New York Times ran a piece about private contractors in Iraq who receive substantially higher salaries than they would receive here, reflecting the living standards and the substantially higher mortality risk of working in Iraq. And these studies are trying to evaluate the impact of mortality on welfare directly. They follow a similar approach looking at how wages do differ with mortality across employments, and then trying to derive a measure of the impact of increased mortality on overall welfare, meaning what this table shows is if we evaluate the cost of increased mortality as a percentage of GDP, how big is this welfare loss compared to the losses we see in per capita GDP. And these losses are substantial, reflecting risk aversion. They are generally higher than the decreases in life expectancy. So for one of the worse-affected countries in Asia, Thailand, which is covered in this table, we see a decline in life expectancy of 1.7 percent.

That's a very small number in the context of the most affected economies in Africa. But even that would translate into a loss in welfare of 4.5 percent, and then the scale goes up to Botswana in this table, where life expectancy declines by over 50 percent, which translates into a loss in welfare of 85 percent, which are numbers that are extremely serious.

Wrapping up, what we see from these numbers is the extremely serious situation we are facing in many of the countries with severe epidemics. And this is a test of will for the international community. We see substantial efforts in various organizations to address the HIV epidemic, for example, through the 3 by 5 Initiative of the World Health Organization, and the issues we do discuss today are extremely relevant in this context in order to arrive at a better understanding of how health--well, in the context I've talked about, how HIV does affect welfare, how it does affect the economy, and this work helps to best devise the policy response.

Thank you.

MR. BIO-TCHANE: Thank you, Markus.


MR. BIO-TCHANE: Well, now I turn to Professor Jamison.

See Mr. Jamison's presentation (1,088 kb pdf file)

MR. JAMISON: Well, thank you -- [tape ends].

-- opportunity that we have both to join you this afternoon in this discussion, and I'd personally like to thank Laura Wallace, who was here a moment ago, the editor of Finance and Development, for forcing me, at least, to do some rethinking of the health and wealth links that go into one of the articles in the current issue of Finance Development that has this special section on health that I think you know about and that in part we are addressing in this forum today.

What I'd like to do in my brief comments now is really two things: first, to just touch a little bit more on the historical record and to underscore on the question of health how dramatic the changes of the last century or century and a half, and particularly the last half-century have been, and the implications of that as both of the previous speakers have stressed--and I will underline it one more time in a moment--the enormous importance of that and the much better understood importance of that for economic welfare that we have today.

So there's a little bit of history, and then I'll turn to raising and offering a few opinions on what all of this means for public policy, because I think the implications for public policy are enormous and so far really have not entered in any substantial way into the discourse on public policy, public investment options in the development context. Of course, many bits and pieces of the discussion are there, but the centrally important rethinking of development strategy that I will argue is implied by the new health economics remains to be done.

First, just to remind us of how far things have come. For approximately 12,000 years after humans settled into agriculture as a way of production for most of the race, life expectancy went up and down with the standard reasons for its going up and down--the famines, the wars, and epidemics--but fundamentally didn't change too much from a range in the low 30s to high 30s. And then perhaps a century and a half ago, things began to change dramatically, and the life expectancy of the country in the world with the then highest life expectancy began about 160 years ago to increase at a rate of 2.5 years per decade on virtually a straight line for 160 years. So life expectancy went up about 40 years in the best country, and there has been some substantial convergence. As the World Bank's chief economist Francois Bourguignon has noted in a recent, I think actually underappreciated paper, the impact on global inequality of this convergence globally in health conditions has been quite significant.

We can't see the screen from up here at all well. Is that visible? Okay.

What this overhead shows is the ratio of life expectancy before and after over about a 50- to 75-year period for Chile in a more recent period and for England and Wales in an earlier period--for Chile between 1930 and 1990. And it's the ratio of--here at the bottom for early ages, the age-specific mortality rates are less than 10 percent today of what they were earlier. The impact is lesser at higher ages, but what's important to note is that the improvements in health have not simply been, as has occasionally been assumed, improvements in infant and under-5 mortality, dramatic as those have been, but the middle-age improvements, in through here are mortality rates, annual mortality rates that are a quarter or a third of what they were 50 or 60 years before this. Just a different way of talking about the dramatic improvements in life expectancy that have been occurring.

Now, obviously, just to put some numbers on the reversal of that, we've seen in a fragmentary way in parts of Eastern and Central Europe and Russia and much more dramatically in a number of countries in Africa, for the African continent as a whole, again, looking at those age-specific mortality rates at two points in time for Sub-Saharan Africa as a whole. As Markus stressed and as we all know, the variation across the continent is quite dramatic. But, again, in the middle-age range, around age 30, you see here between the green line, which is the 1990 UN estimates of mortality rates at about 0.5 percent per year in middle ages--this is for females--a doubling for the continent as a whole, to the red line in the year 2000. And what the difference between the red and green line shows is just the very strong concentration in middle ages that, again, we're qualitatively familiar with.

It also shows, however, the continued improvement, albeit at a slower rate, in under-5 mortality rates. So for younger ages' mortality rates, despite an increase in mortality from AIDS in that decade, despite that increase there has been an overall decrease in mortality in the younger age groups.

And then to restate what I think I personally would hope is one of the two or three main points of the session as a whole today, the importance of trying to quantify in a monetary way, not only to quantify in a monetary way, but to add to the way we think about the value of better health, the impact on full income, as Gary Becker at the University of Chicago has been laboring at, and others, or welfare, as Markus and David have, just to show the picture of the two slides that I've just shown in terms of the changes in GDP per capita contrasted to changes in full income.

So these different yardsticks, the very inadequate--and all economists know to be inadequate--measure of welfare that GDP per capita reflects, despite that common knowledge, for reasons that Markus alluded to, it is still the standard widely used for the performance of an economy. So maybe it's not economic welfare but economic performance is usually measured by per capita GDP.

We take Kenya here and see in the early period, 1960 to 1970, those three early decades, the red bar shows the change, annual change averaged over the decade in GDP per capita, essentially no change in the 1960s, important gains in the 1970s, a reversal back to almost no change from 1980 to 2000 in GDP per capita. But the full income measure, the measure that includes a valuation of the changes in mortality, shows a much more positive picture early on, and then the dramatic decline in the last decade that we all feel to be true. And this stands in contrast not just for Kenya but for many, many other countries. The impact of the AIDS epidemic, as conventionally measured--and it's obviously quite arguable--has been real but probably quite modest on per capita GDP. That's the wrong measure. And one major, I think, lesson of some of the current work in health economics and national income accounting is that GDP really is the wrong measure. However crude an improvement it is, it is an improvement to use something like full income. It tells a qualitatively different story about the economic history of Africa, much more successful economic history up to the late '80s or 1990s, and a much more real picture of the consequences of the AIDS epidemic in countries that have been heavily hit by AIDS. And we're not talking about something far off in the future. We can, you know, see the various projections of possible collapse, which are probably correct or may be correct in 20 or 30 years through a variety of mechanisms. There have been important papers out of the World Bank and elsewhere on that, probably true. But what we're talking about is history to date, not possible adverse scenarios in the future.

So full income, not GDP per capita, as our central way of measuring economic welfare. I think that we should be adding full income much more systematically into the CASs and economic reports of the World Bank, the parallel kinds of reports from the IMF. This should become over a period of a few years routine--not to replace GDP per capita, as David Canning stressed, very important, but to be sitting beside it to tell the somewhat different, fuller story that it does tell.

Now, what are the implications, some of the implications for policies, particularly public sector policies, development assistance policies, to affect the poor that emerge from this changed pattern of thinking about the importance of health for welfare in general, welfare of the poor more particularly? How far along are we on rethinking development strategy, if we should be at all? As I think we really should for the reasons we've just been discussing.

Let me put up a picture from the World Bank's 1980 World Development Report, a team led by Paul Eisenman, on the interrelations of multiple facets of poverty. My own view is that the 1980 WDR was probably the most influential and one of the best that the Bank has produced, and Eisenman painted this picture of, first, everything influencing everything else. Here are--obviously one can slice this pie slightly differently, but major dimensions of human welfare and poverty income, fertility levels, physical development, that is, nutritional status, cognitive development, educational status, and health status. And each of these two-way arrows connecting each of the boxes shows, as we all expect, that everything affects everything else.

However, all that said, Eisenman's analysis led him to conclude that the central entry point into that web for affecting all dimensions of outcome but for particularly the welfare of the poor was the one that is highlighted here: primary education to affect cognitive development as not the only but as the major public sector investment priority for dealing with poverty. That was what should be done. I don't want to end up arguing too strongly against that, but I will suggest the reorientation toward health. David Canning stressed the importance of--well, so we observe, so we come to believe that health improvements, health changes as a component of economic welfare, full income changes are enormously important, that doesn't have much in the way of implications for investment policy unless investments can at reasonable cost over a reasonable time frame substantially influence the course of the health of populations.

Now, that's obviously a very long story about all the pieces that go into that and a particularly important set of stories around--and incomplete set of stories about the parts of that that deal in particular with AIDS. But let me provide just a minute or two background to thinking about that, point to generally a very positive set of answers in the literature about the power and feasibility of health-specific interventions to really work over a period of less than a decade and at moderate costs.

What have been the origins of this transition in the last 150 years in the health outcomes of the poor, health outcomes of populations more generally?

Let me differ slightly with David Canning in emphasis, though not completely, about the importance of one of the arrows in his diagrams, and the arrow in this version of the diagram is the one from income to health. There is, I think, no question that that is a real effect, as far as economists ever establish anything causally, a causally established effect. I'd say the evidence is now that it's not a major effect. It's the diffusion probably of new technologies. It's education levels of populations that facilitate that diffusion among other public policies, and that that technical change, the adoption of the vaccines, the wider spread, more appropriate use of antibiotics as a means of controlling diarrheal disease, of hygienic behavior with respect to microbes, appropriate behavior with respect to use of substances, alcohol, drugs. All of these ways of changing behavior or these physical technologies--drugs and vaccines--are things that can be bought or done typically at very, very low cost, even in the environment of a lower-middle-income or possibly lower-income country. One can buy these changes, and recent analysis--well, certainly numbers are quite arguable--that colleagues of mine and I undertook of what were the sources of infant mortality decline over the last 30 years around the world started with this famous--a version of a famous picture by Samuel Preston showing the relationship between income levels on the horizontal axis and infant mortality rates vertically. And basically the declining--the less sharply declining version of this for a variety of reasons than the one that David Canning showed, but declining infant mortality with respect to income, that fact and the magnitude of the slope of that are not particularly what I want to draw your attention to, but it's rather the extremely different placement of these two lines in the early '50s versus the early '90s.

In this 40-year period, at any given income level, infant mortality rate has halved or a little more than halved. So something beyond income and all those good things income buys--more and better food, access to better shelter, access to water, access to sanitation, all those highly income-elastic things that are important for health--taking all that into account, the bulk of the change was due to the shift in the relationship between income and health rather than movement along the relationship.

This has, I think, a lot of implications for how we think about public policies to actually accelerate mortality decline and health improvements. Trying to quantify in a crude way, in a way that's analogous to the way economists try to decompose the sources of economic growth into changes in physical capital levels, education levels, health levels of populations, here we tried to decompose the decline in infant mortality rates into these four constituents: changes in income levels, changes in education levels of populations--this is across about a hundred countries over these 40 years, 30 years--changes in physician availability, and the diffusion, basically, of low-cost technologies.

We find that income growth is responsible--and this is a period of very substantial income growth on average across these countries--was responsible for perhaps only 7 percent of IMR decline. Education changes, much more important, substantial education changes as well. Technical progress was the driving thing.

Well, what does that mean? What does technical progress mean? Well, a long and difficult story, but let me try to summarize it simply by saying that we do have for many of the remaining major killers at least a modest arsenal that has been now much and well written about in terms of the Millennium Development Goals for many of the important conditions, a modest arsenal of low-cost technologies or rehydration therapy, the standard list, and that the cost of averting a death through many of these technologies will be on the order of $500 to $5,000. Five thousand dollars would be at the high end of the range for many of these.

What this means is that if we can mount the right institutional responses--a big "if" but an "if" that has been answered positively by many countries, including countries that are, on the whole, not only poor but relatively weak institutionally--that it is possible to buy with relatively specific, well-known technologies, major improvements in health. A much more difficult set of issues, a much more uncertain set of issues around dealing with AIDS. I think on the whole somewhat promising. I think part of the reason the epidemic has gone as unchecked as it seems to have gone in Africa in the last 15 years is that governments and development assistance agencies have done virtually nothing about it in most countries. There has been very little money put behind the interventions that we think are likely to work to prevent transmission and now to control the progression of the virus in humans. The money has not been there.

It is only just beginning to flow now. The World Bank's big and visible programs are not disbursing much yet, and they're very recent in Sub-Saharan Africa. The U.S. program, despite a huge amount of hype by the current administration, has really not spent a dollar after two years in developing countries. And that may change. We hope it will. The Global Fund has been hard at work, the newly established Global Fund for Controlling AIDS, Tuberculosis, and Malaria. But it remains under funded as well.

So the resource constraint I think has been a binding one. The money hasn't been put there. That's part of why we have seen the rapid movement of the epidemic.

Money, which in my mind means we're talking about public money, either development assistance money or domestic public sector money. That's not--obviously private sector money is available and used as well, though, on the whole, the evidence is, in terms of producing health or even in terms of reducing financial risks from adverse health events, not as well spent typically.

But where do we end up? And here I think is a second major message that I would take away from the current literature. We do have a lot of technologies that are far from fully utilized. There are important political constraints, important institutional capacity constraints. All those are very real. But, in addition to those, there's a huge constraint on the funding. There has not been the money in many places behind these interventions. So where in the overall public sector set of investment priorities should the money go to improve health and more generally to improve the welfare of the poor, the stated mission or the central--the most important of the state missions of many of the UN agencies and the bilateral development assistance agencies?

I would suggest a restructuring, as David Canning put it, to a health-led development strategy that re-does the five-pointed star of the WDR of 1980 into--and I'm overstating the case here, but improving health at the center because of its potential power for influencing each of the other items. Health affects education. It affects welfare directly of the poor as well as their productivity. It leads to reductions in fertility. Now, there are other causes of all of these things, certainly. It enhances nutritional status.

The circles here are the public sector investment opportunities associated with each of these welfare outcomes that are intermediate to overall welfare but constituents of it as well. Investing in health is probably at this point by most governments, at this point by most development assistance agencies, seriously short of resources relative to the envelope of resources that they have.

Is this an established consequence of-- conclusion of careful economic analyses of public sector investment priorities? No. That analysis needs to be done. But I think that what we're seeing in terms of the changed picture of the economic value of better health, the improved understanding of the power and cost of the--relatively low cost of the interventions we have at hand, that when this analysis is done of where the major public sector investments to affect the poor, those circles around the edge of that diagram, when that analysis is done I think we'll see the desirability of radical changes in development assistance policy and public sector budgetary priorities.

Thank you.


MR. BIO-TCHANE: Thank you very much.

Well, colleagues, we have officially five minutes left, but I'll give the floor to the participants for a few questions or interventions. Yes? Please take the microphone.

QUESTION: I have a question for Mr. Canning and Mr. Jamison. I'm not an economist, [but] I work for the Fund. A couple of weeks ago, I encountered some interesting numbers in the Washington Post. They compared health care models in Costa Rica and in the United States. Probably you have heard the numbers, that life expectancies are the same in both countries. But health care expenses in Costa Rica, $500 per capita per year; and in the United States, $3,500 per capita per year. And the number of doctors per capita in Costa Rica is twice as low as in the United States.

I have a question about cost-efficient health care models, because we cannot talk about links between health and wealth without mentioning cost-efficient models.

What national model or ideal(?) health care model would you recommend if you had an opportunity to devise such a model?

Thank you.

MR. BIO-TCHANE: Let me take another question. Yes, ma'am?

QUESTION: Thank you. I work with an NGO group. Dr. Jamison, I had one question about your model where the women's mortality rates were dramatically different, I believe in the 1980s and 1990s. And you said it was a consequence of HIV/AIDS, and I wanted to know how you determined that causality.

And then, also, the focus today is on HIV/AIDS, but what's the comparable impact, economic impact of HIV/AIDS compared with malaria, TB, or other diseases, even heart disease and so on? What kind of comparability is there in terms of life expectancy, mortality, and so on?


INTERVENTION: You've got the Director of the African Department sitting to your right. Would you sort of recommend to him that he sort of push much harder for his staff to provide statistics on full income as opposed--in addition to GDP per capita in our staff reports and whatever?

MR. BIO-TCHANE: I understood that GDP is not relevant.


MR. BIO-TCHANE: One final question.

QUESTION: I was just interested--I mean, I'm very sympathetic to the case that has been made on more health spending, but if you step back a bit, you can argue--I mean, question how come health has been so successful in a way. If the resources haven't been there as much, the actual record on health over the last 40 years, with the exception of HIV/AIDS, which is clearly understood, seems to be incredibly good. In fact, we'd be very happy if the record in many other areas was quite as good as the one you showed in the graphs showing this great improvement.

So a question. How come that's happened in a way? And how do you expect the incremental spending that you're proposing to build on that? What are the additional things that one could pick up?

MR. BIO-TCHANE: One final question.

QUESTION: I'm doing an internship from the Pan-American Health Organization, and I have two questions for Mr. Jamison.

The first one is about [inaudible] talking about that and how you are going to maybe define new indicators. How can you address the problem of inequalities within the indicators or the problems of regions that have different data [inaudible] general data?

And the second question is more relating from, for example, when you are talking about the use of technology from some regions. How can you address the question of sustainability in those regions if you don't do it as a whole, taking into account education or other issues?

Thank you.

MR. BIO-TCHANE: Panelists?

MR. CANNING: On the first question, I think in the poorest countries in the worst health, we have a set of very cost-effective public health measures. I mentioned childhood vaccination, micronutrient supplements, iron supplementation, vitamin supplementation, and de-worming. These things are highly cost-effective ways of improving health. Those are very good investments.

Once you get up to middle-income and richer countries, where it's no longer infectious diseases, it's non-infectious diseases, the cost of improving health goes up quite dramatically. And then I think that the benefit/cost ratio is less clear.

Now, I think the point is we have a lot of evidence in very poor countries that we can have very effective interventions which really work, even as Dean was saying, where institutions are weak, which is quite unusual. That's not true in most sectors. And I think there are still a lot of countries, though, where vaccination rates are low and sometimes falling, where we don't have large de-worming programs, and where it's basically shocking that we're not doing more for health.

I think the question of once you get up to middle-income and move to tackling non-infectious disease is less clear. But I'm very clear in my mind that dealing with these infectious diseases is a top priority and has enormous welfare and economic benefits.

In terms of the measurement of welfare, I think that the--again, everyone agrees, I think, that GDP per capita is not a complete measure. And I think what's been showing up recently is that it's actually a very misleading measure. I think the idea that we have that everything moves together so that GDP per capita captures the broad notion of development is, in fact, turning out to be just wrong. That's true perhaps in general, but in some specific cases, and particularly with HIV/AIDS, it's completely misleading. And that's why we have to move to a broader notion of welfare.

And I think the sort of work we're talking about of valuing the health improvements gets around the problem of, for example, the human development index with the way it's arbitrary. We want to actually measure in similar units the welfare gains, and I think that's not the stage we're getting to.

MR. JAMISON: On the question of a health finance model, it's a slightly different subject. I think, however, that the lessons that we can draw, particularly from the comparisons of Europe and the United States, is that universal mandatory public finance, either through social security systems or through general revenue taxation, which are often established mostly for equity reasons, turn out to be more efficient as well. In a very imperfect environment, they tend to be the least [inaudible]. In the lower-income countries and in the aging populations, that's a more difficult proposition. Private finance will inevitably dominate health finance in low-income countries for a long time to come. So the argument there I think is basically, whatever you do, the efficiency argument is to do it universally as opposed to emphasizing the poor with public finance for health.

Now, that is a controversial proposition. Peter Heller would argue that when we get to higher--aging, higher-income countries, the simple capacity of the public sector to finance universal health care of the sort that populations probably want will have disappeared, and I don't know, but there's a very broad intermediate range where I think the European--variants in the European model are probably severe.

Other causes of death. Well, one of the things in the Finance and Development issue that is pointed to in low-income countries today, low- and middle-income countries, there are about 2.5 million AIDS deaths. There are 13 million deaths from cardiovascular disease, about a million malaria deaths. But the non-communicable diseases are dominant and have been dominant for a long time.

Now, obviously there are important exceptions in many countries where AIDS is relatively much more important. But dealing in a competent way with the NCDs is as important, but much less visible. It's a harder problem, as David Canning was alluding to, because we don't tend to have the decisive interventions that we do for many infections, and many of the interventions we have are highly costly. However, there are things like control of smoking, which we do have a fair idea how to do, that is extremely important for heart disease, for cancer, and chronic pulmonary disease, which are the three biggest categories of NCDs.

I would answer--or Mr. Bio-Tchane [inaudible]. I would make two specific recommendations on what you would put beside your GDP per capita accounts. I would put GDP per capita by quintile of the population, because the stories that are told are phenomenally different. All of Chile's economic growth is in the top quintile, and it takes 15 times as much economic growth in the bottom quintile in Chile to generate the same 1-percent increase in total GDP per capita growth rate as it does in the upper decile. So break it down by quintiles and do full income, and you've got Markus Haacker to do it for you. So I would say that it is sufficiently misleading just to have GDP [inaudible] the Fund and the Bank should definitely stop that practice. Not get rid of GDP per capita. It's important. Add to it. And you've got lots of economists, and I know they're busy.

Let me stop there. There were a couple of other important questions I answered, but we [inaudible].

MR. BIO-TCHANE: Well, thank you very much, Dean, Markus, and David. I very much would like to thank you on behalf of the participants. I think you have--I really would like not to sum up your interventions. It was very insightful. And I certainly would like to take back to the department your advice, Dean, on the GDP, and probably Markus will help us on that. Tony Boote [IMF staff member], I think you should take that back to PDR also.

Thank you again very much, colleagues.



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