Investing in Health: A Macroeconomic Exploration of Short-Run and Long-Run Trade-Offs

Abstract

This paper aims to unravel the competing effects of the health investment. It explores, both analytically and numerically, the equilibrium shift and transitional dynamics after a one-time policy of health investment. We find that such a policy improves health status in the long run, but harms economic growth in both short and long term. The relative sizes of these competing effects depend on the specific health parameters. Within the plausible range for the value of health relative to consumption, households gain welfare in the long run as long as the effectiveness of labor in health production is large. The expanded health sector policy makes households worse off only if labor is rather unproductive in producing health and households value health relatively little. The findings challenge the policy recommendations of the World Bank (1993) and World Health Organization (2001) in that good health increases neither the productivity of workers nor the economic growth rate. It is hoped that the relative simplicity of our model, compared to the existing theoretical literature, can help close the gap between formal academic work on this topic and actual debates among policy makers in both developed and developing countries.