Professional Documents
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GROUP MEMBERS:
AELYA ZAIDI
AMAN KUMAR
AYESHA KATPAR
SYED ARUBA ALAM
1 Abstract
2 Introduction
Nations cannot be developed without investing in health and education. Both are a
multidimensional process, on one side, they enhance the economic growth and on the other side, reduce
poverty by increasing productivity. Poverty has strong linkages with health and economic growth. In
Pakistan, this sector has always been neglected by the public sector. Health in the private as well as public
sector faces numerous problems. Some of them being slower investments in hospitals, high levels of
inflation and poverty, income inequalities, gender inequalities, regional inequalities, poor conditions in
public sector health care facilities, high fee in private sector institutions, and poor implementation of
polices. These factors have catered to slow economic development and human capital accumulation in
Pakistan. Thus, health serves as one of the most important ingredients of human capital as well as of
economic growth. The health sector has always been consistently neglected by government organizations,
poverty has also been increasing steadily leaving Pakistan unable to realize sustainable economic growth.
A country that is sufficient in terms of healthcare is likely to perform better than most countries.
The accumulation of human capital will impact overall welfare of the nation. Literature shows that as
health factors increase, per capita growth increases. Good health will influence the level and quality of
education and performance in the positive direction.
In addition to this, health of an economy directly affects economic growth. One of the main
indicators that we have studied in this research paper include the life expectancy at birth. In theory, there
exists a two-way relationship between improved health and economic growth. Health and other forms of
human and physical capital increase the per capita GDP by increasing productivity of existing resources
coupled with resource accumulation and technical change. Furthermore, some part of this increased
income is spent on investment in human capital, which results in further per capita growth. Improvement
in health means better nutrition, public health, medical care facilities and education, and this results in
more awareness. Factors like nutrition, education, medical facilities ensure that life expectancy increases.
This increased life expectancy, combined with the mentioned factors bring about a positive change in
economic growth by affecting labor productivity among other factors.
Another aspect of this paper covers financial development in regard to this framework. As the
economy prospers, more investments are invited, and such investments are beneficial, especially, in terms
of improvement in health of the economy. Financial development in the health sector increases medical
care through an income effect thus expanding the health status. According to the literature, the outcome
of financial development on the health outcome in developing countries is stronger as compared to in
developed countries. From this, it can be suggested that the return from financial development on health
is higher for developing countries. According to Bhatta (2013) financial deprivation in the short run
staggers growth in other variables which contribute to economic growth such as income and education.
Also, the impulse response analysis in Bhattis study showed that financial shocks have a mild impact on
health spending but an immediate impact on outcome variables. We can also link financial development
to better health. Opportunities to generate income, especially for lower-middle income class families are
created due to ease of access to financial resources. Higher income can then be translated into better
opportunities for individuals to consume nutritious food, reduce poverty, increase standard of living and
get an education. Claessens & Feijen (2007) further complemented this phenomenon by conducting a
cross country regression analysis for the years 1980-2003. Here, it was concluded that higher levels of
income and financial development expanded credit, savings and insurance and in turn financing health
care.
Next, we will examine the income inequality for the economy which is measured using the GINI
coefficient. Income inequality is said to have a negative relationship with life expectancy at birth. Though
in line with the literature collected, the GINI coefficient has insignificant effects on health outcomes.
Literature also suggests a positive relationship between the marginalized index and infant mortality. Also,
the marginalized index and GINI coefficient had insignificant effects on the health out-comes. In line with
these results it can be said that the health system reforms have a positive impact on the overall economy
(Florez et al. 2014).
This paper is organized as follows; the first section introduces the topic and the research
objectives. The second reviews literature on the subject and discusses results that are expected for the
empirical analysis to be done. The third section describes the data that is used and the econometric
methodologies used. The fourth section discusses the regression model and techniques used. The last
section concludes the paper and proposes policy recommendations.
3 Literature Review
Since the inception of financial, governmental and technological improvements along with
research and development, the impact of health and education has further been understood. Therefore,
over the years, a close relationship between the level of health care in a society and its economic
development has been established.
By incorporating a Granger casualty test, Bedir (2016) in his analysis of this phenomena used the
healthcare expenditure and income levels of the emerging markets in Europe, the Middle East African and
Asian countries. Data collected over the period from 1995 to 2013 was used to highlight the importance
of healthcare on improving human capital. The study concluded that with an increase in expenditure on
healthcare, a larger impact on the economies of Egypt, Hungary, Korean Republic, South Africa, and the
Philippines was observed. On the other hand, the evidence from Greece, Poland, the United Arab
Emirates, China, Indonesia, and the Korean Republic supported the income view over the health view.
Despite the differences in the economic structures of these countries, the impact of an increase in
healthcare spending and income on the economy were similar. In line with the conventional theory, it
could be concluded that a two-way casualty exists between economic growth and healthcare expenditure.
Health thus plays a significant role in improving the level of human capital which leads to a sustainable
ecological, social cultural and economic growth.
Abbas & Hiemenz (2011) studied the macroeconomic factors that determine health care using
time series data in Pakistan from 1972-2006. Analysis showed that health care is a necessity for a country
like Pakistan, in comparison to some OECD countries. Furthermore, the results indicated that provision of
health care to people living in rural areas might prove costly, mainly due to practice of urbanization.
Unemployment also has a negative impact on health care expenditures for the people. Income also plays
an important role in forecasting health expenditure for Pakistan (Abbas & Hiemenz, 2011).
Another research by Akram et al. (2008) set out to investigate impacts of various health indicators
of economic growth for Pakistan. Time series data was collected from 1972-2006 for Pakistan. Regression
results indicate per capita GDP positively effecting health indicators for Pakistan in the long run. Results
also highlight that this positive relationship is only a long run phenomenon, and does not exist in the short
run. Researchers suggest in accordance to results that health of human capital should also be added to
the mix to study impact on growth (Akram, Padda, & Khan, 2008).
Kyei-Brobbey et al. (2014) in their paper discussed the factors of health care expenditure for
Ghana. Data was collected for a time series covering years 1970-2008. Co integration and stationarity was
tested for public health expenditure and other socio economic factors. Results discuss various factors that
impact the public health expenditure for Ghana like the real GDP, life expectancy, inflation, crude birth
rate, urbanization, etc. The relationship between real GDP and public health expenditure is positive.
Meanwhile, improvement in health status were measured by crude birth rates, life expectancy, and
national income. Researchers also mention that these variables need to be further analyzed to be able to
achieve improvement in healthcare (Kyei-Brobbey, Boachie, Mensah, Sobiesou, Immurana & Iddrisu,
2014).
In this paper Ghorashi et al. (2017) studied factors regarding economic growth and health
economics, specifically for Iran, from 1996-2010, using Dynamic Ordinary Least Squares method. Empirical
findings highlighted total health expenditure, life expectancy, and total Iranian population effecting
economic growth positively. While factors like foreign trade and financial development also positively
impact economic growth. According to the authors of this paper, increasing health care and health related
expenditures is likely to boost economic growth (Ghorashi, Rad, & Eslami, 2017).
Peykarjou et al. (2011) analyzed the link between economic growth and health among members
of Organization of Islamic Conference states from 2001-2009, using mean time series analysis. Factors like
fertility rate, life expectancy, etc also influence economic growth according to panel data regression.
However, life expectancy will have a positive effect on economic growth, while fertility rate has a negative
effect on economic growth (Peykarjou, Gollu, Gashti, & Shahrivar, 2011).
Afridi (2016) in his paper investigates the relationship between human capital and the economic
growth of Pakistan for the years 1972 to 2013. He states that the potential of the citizens of a country is
shaped by collectively considering each individuals overall ability which he describes as human capital.
Major attention is given to the education and health component of human capital which are believed to
have a significant impact on the level of human capital. Therefore, the human capital is explained by the
proxies of birth rate, infant mortality rate and primary enrolments rate. Autoregressive Distributed Lag
(ARDL) and Vector Error Correction models are constructed to study the relationship between the
variables from which it is deduced that the GDP of Pakistan has a positive relationship with the birth rate
and a significantly negative relationship with the infant mortality rate concluding that human capital plays
an important role in the prosperity of a nation indeed. However, this conclusion is criticized to be
ineffective in the short run and effective in the long run only if investment is made in human capital in the
short run. To achieve this, a lot of consideration is essential for health and education sectors. The
allocation of budget needs to get revised and shift focus towards the core elements of a good economy
by investing in health and education (Afridi, 2016).
Raza et al. (2013) in their paper investigated the link between economic growth and health
indicators. For the purpose of this study data was collected for Pakistan from 1980 to 2012, using OLS
testing and Granger Causality. The main aim of their study is to highlight the factors that would help
increase economic growth in Pakistan, directly or indirectly. Results of the tests indicated that factors such
as health expenditure, health related investment, fertility and life expectancy significantly influenced
economic growth. While, factors like population per bed and infant mortality rate negatively influence
economic growth. Raza et al. suggest increased investment is likely to increase health facilities, which will
result in overall sustainable growth for the economy. (Raza, Majeed, & Islam, 2013)
Onisanwa (2014) in his paper, examines health related impacts on the economic growth for
Nigeria. To study the hypothesis, time series data was collected from 1995 to 2009, and co integration
and granger causality testing was conducted. The results indicate that GDP will have a positive co
integrating relationship with health indicators for the long run. The researchers suggest that a high level
of economic growth can be achieved by generally upgrading the health status of the people of Nigeria
who are suffering, in general, as Nigeria is already a developing country and short on adequate health
resources (Onisanwa, 2014).
Khan et al. study the relationship between expenditure on health care and economic growth, and
simultaneously the link between SAARC countries. A panel co integration and causality analysis was
conducted using data from 1995 to 2012. A variety of independent variables are considered such as
literacy rate, labor force, per capita income, population of the age 65 as major indicators physical and
human capital. To study causality between GDP and expenditure on health care, a newer technique was
applied, which shows a unidirectional causal run. Unit root and co integration tests were conducted for
the panels, dynamic ordinary least squares method for long run parameters and unrelated regression for
short run (Khan, Khan, Razli, Sahfie, Shehzada, Krebs, Sarvghad, 2016).
Dhrifi (2013) studies the impact of financial development on reduction of poverty. Sample data
from 89 countries over from 1990 to 2011 was taken. The model being considered connects poverty,
inequality and growth. To be able to study effect of financial development on poverty, the author decided
to consider it two ways: a growth impact, and then a then disparity amongst them. Analysis suggests that
there exists a positive impact of financial development on reduction of poverty, also that this impact is
determined by the magnitude of effect of financial development with growth and inequality. Authors
suggest that creation of microfinance institute will enable low income households microcredit as such
households are not directly favored by the working financial sector (Dhrifi, 2013).
Wagstaff (2002) investigated the relationship between poverty and ill health. The health of
individuals living in developing countries is usually poor. Moreover, there is a health gap between high
income and low income groups as well due to deprivation and poverty. This vicious cycle of poverty
breeding ill health and vice versa was explored in this paper that emphasized on the need for policies
required to combat health sector inequalities and provide access to health services. By analyzing the
various determinants of poor health and its effects on the economy, one can highlight the problems being
faced in their own surroundings and society. Thus, an increasing pressure needs to be placed on aid
agencies and the government to curb those factors which lead to ill health (Wagstaff, 2002).
4 Data and Methodology
Time Series data, having annual frequency, for the variables: per capita GDP, Domestic Credit to Private
Sector (Proxy for Financial Development), Life Expectancy at Birth and Income Inequality (Gini Coefficient)
was taken for the economy of Pakistan over the period 1980 2015; The description of the variables is as
follows:
Here we have taken Life expectancy at birth, which plays the role of Health Indicator. Log of GDP per
Capita is a measure of economic growth. We have included Financial Development in the data set in order
to investigate whether there is any association ship (long run or short run) of Financial Sector with the
Health Sector, also want to evaluate the causality, if in case it exists. Furthermore, literature suggests
higher income is associated with longevity and differences in life expectancy across income groups
increases over time, to capture this phenomenon we included income inequality as a control variable it
helps to better understand the relationship between LEB, FD and GDPPC.
Our objective is to find a mathematical function describing the relationship between the above-
mentioned variables, since we are going to find the causality among the variables that is why it is
appropriate to the define the functional form implicitly:
(, , , ) = 0
First we have discussed and plot the trends of the time series data at hand and based on the plots we
have deduced the appropriate model and conducted the unit root test, after ensuring all the variables are
I(1) in nature we investigated the Long Run Relationship between the variables using the Engle Granger
test and Johannsen Cointegration test. Based on the results VAR or VECM model was estimated and
further impulse response and Granger Causality was found.
5 Empirical Results
In this section, we have estimated the results using Eviews 8. Section is divided into 5 subsections.
30 6
28 4
26 2
24
0
22
-2
20
-4
18
-6
16
-8
14
1980 1985 1990 1995 2000 2005 2010 2015
1980 1985 1990 1995 2000 2005 2010 2015
D(FD)
Domestic Credit to Private Sector
At Level proxy for Financial Development have a non-zero intercept and no trend however no such
behavior is observed at the first difference.
LOG(GDP Per Capita) First Difference of LOG(GDPPC)
11.0 .06
10.9 .05
10.8 .04
10.7 .03
10.6 .02
10.5 .01
.00
10.4
-.01
10.3
-.02
10.2
1980 1985 1990 1995 2000 2005 2010 2015
1980 1985 1990 1995 2000 2005 2010 2015
D(LOG(GDPPC))
LOG(GDPPC)
By applying Log, it gives us the growth in real GDP per Capita, at Level the series has a non-zero intercept
and a deterministic trend and first difference no intercept and a deterministic trend is observed.
Life Expectancy Total at Birth First Difference of Life Expectancy, Total at Birth
68 .03
66 .02
64 .01
62 .00
-.01
60
-.02
58
-.03
56
1980 1985 1990 1995 2000 2005 2010 2015
1980 1985 1990 1995 2000 2005 2010 2015
D(LEB)
Life Expectancy Total at Birth
Same behavior is observed for life expectancy at level and first difference.
42 12
40
8
38
4
36
34
0
32
-4
30
28 -8
1980 1985 1990 1995 2000 2005 2010 2015 1980 1985 1990 1995 2000 2005 2010 2015
GINI D(GINI)
Gini Coefficient also shows the same behavior as the rest of the variables.
Correlation
t-Statistic FD GDPPC GINI LEB
FD 1.000000
-----
Table 2
5.3 Unit Root Test (Augmented Dickey Fuller Test)
To check the stationarity of the series a unit root test has been performed, at 5% of significance,
individually on the four time-series. In Log of GDPPC and LEB a trend and an intercept has been added at
level, as it is trivial from the above plots. For FD and GINI only intercept is added as exogenous. To check
stationarity in the first difference no exogenous is added in the four variables. The results are summarized
in the tables below:
This shows all variables have order of Integration of 1, i.e. all variables are I (1). Prerequisites of Engle
Granger are satisfied.
Interim Regression
The result shows that there is no unit root at 5% level of significance (using Mackinnon (1991) critical
values adjusted for the number of variables) which implies that the residual series is stationary. Hence
there is cointegration between the variables of the interim regression. So, Vector Error Correction Model
(VECM) will be a good approach to establish causality and relationship between the first differences of
the variables.
We can proceed further and carry some more rigorous tests like Johansens Cointegration test but
sometimes the results of various tests conflicts. This conflicting result is due to the fact that the OLS
cointegrating vector is quite a bit different than the cointegrating vector estimated by the Johansen MLE.
The Johansen MLE can sometime give very strange results. One reason for this is that the finite sample
distribution of the Johansen MLE does not have any moments (as proved by Peter Phillips in a Journal of
Econometrics article) and so the tails of the finite sample distribution are very fat which can produce
extreme values of the cointegrating vector. This is similar to the situation with the LIML estimator in the
traditional simultaneous equation model (the 2SLS estimator has moments in overidentified models; the
LIML estimator does not).
Table 4
According to LR, FPE and AIC 4 is the optimal number of lags. To determine the number of cointegrating
equations Johansen Cointegration Test is used. The null hypothesis for the trace test is that the number
of cointegration vectors is r=r*<k while the alternate is r=k. The table below shows the results of the
Johansen Cointegration Test.
.6 10
.4
5
.2
.0 0
-.2
-5
-.4
-10
-.6
-.8 -15
1975 1980 1985 1990 1995 2000 2005 2010 1975 1980 1985 1990 1995 2000 2005 2010
The residuals of the two equations are plotted. Trend seems to be non-stationary and in fact they are non-
stationary as unit root does exist. Now the VEC model is estimated with one cointegrating equation.
LEB(-1) 1.000000
LOG(GDPPC(-1)) -28.64804
(2.57269)
[-11.1354]
FD(-1) -0.790996
(0.16323)
[-4.84587]
GINI(-1) 0.894175
(0.16424)
[ 5.44444]
C 234.2452
D(LOG(GDPPC
Error Correction: D(LEB) )) D(FD) D(GINI)
Since error correction coefficient of every ECM model that is displayed above is positive, it indicates that long run
causality is absent from all the variables. In the long run, there is no causality between these variables.
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