Health and

Development
A compilation of articles from Finance & Development

International Monetary Fund

Washington, DC
December 2004
 © 2004 International Monetary Fund

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Preface
The past century has been marked by rapid advances in human welfare. People in most
parts of the world are healthier and are living longer. While this trend is likely to con-
tinue, hopes are fading in some regions where progress slowed or stopped in the 1990s,
primarily as a result of the AIDS epidemic.
This compilation of articles published over the past five years in the pages of F&D
looks at the important links between health and economic progress. Articles range over a
variety of topics, from the Millennium Development Goals and their health-related tar-
gets for 2015 to the economics of tobacco control. Several articles examine the impact of
AIDS, while others look at debt and the intellectual property aspects of health care.
By publishing the articles together, we hope that they will form a useful starting point
for those examining the economics of health in developing countries.

Laura Wallace
Editor-in-Chief
Finance & Development
December 2004

Health & Development iii

 Contents

Preface
1 Getting There
How to accelerate progress toward the Millennium Development Goals
Mark Baird and Sudhir Shetty
8 Checking Up on Health
A chart-based description of the world’s health trends
10 Health, Wealth, and Welfare
New evidence and a wider perspective suggest sizable economic returns to better health
David E. Bloom, David Canning, and Dean T. Jamison
16 Making Health Care Accountable
The new focus on performance-based funding of health services in developing countries
Robert Hecht, Amie Batson, and Logan Brenzel
20 New Antimalarial Drugs: Biology and Economics Meet
Ways to stop or slow the spread of drug-resistant strains of malaria
Kenneth J. Arrow
22 Medicines, Patents, and TRIPS
Has the intellectual property pact opened a Pandora’s box for pharmaceuticals?
Arvind Subramanian
26 Debt Relief and Public Health Spending in Heavily Indebted Poor Countries
Sanjeev Gupta, Benedict Clements, Maria Teresa Guin-Siu, and Luc Leruth
30 Making Services Work for Poor People
Why the poor need more control over health care and other essential services
Shantayanan Devarajan and Ritva Reinikka
36 Confronting AIDS
Developing countries must face the realities of the epidemic
Lyn Squire
39 Coping with the Impact of AIDS
The strain on limited resources
Mead Over
43 Setting Government Priorities in Preventing HIV/AIDS
Public policy is an effective weapon
Martha Ainsworth
48 Making AIDS Part of the Global Development Agenda
AIDS is a development problem that must be addressed globally
Robert Hecht, Olusoji Adeyi, and Iris Semini
53 Death and Taxes: The Economics of Tobacco Control
Tobacco control can have big health benefits without harming the economy
Prabhat Jha, Joy de Beyer, and Peter S. Heller

Health & Development v

vi Health & Development
 Reprinted from F&D
March 2004

Health, Wealth,
and Welfare
David E. Bloom, David Canning, and Dean T. Jamison

T
HE LAST 150 years has witnessed hygiene, and the development of antibiotics
a global transformation in human and vaccines.
health that has led to people living Chile provides a well-documented example
longer, healthier, more productive of dramatic mortality decline. A Chilean
lives. While having profound consequences female born in 1910 had a life span of
New evidence for population size and structure, better 33 years. Today, her life expectancy exceeds
health has also boosted rates of economic 78 (only 2 years shorter than that in the
coupled with growth worldwide. Between the 16th cen- United States). In 1910, the odds were more
a wider tury and the mid-19th century, average life than one in three that she would die before
expectancy around the world fluctuated but age 5; today, they are less than one in fifty.
perspective averaged under 40 years, with no upward Moreover, for middle-aged people, death rates
suggest trend. Life spans slowly but steadily are also now far lower: today’s Chilean female
sizable increased in the second half of the 19th cen- is far less likely to die as a young adult from
tury and then jumped markedly in the 20th tuberculosis or childbearing or in middle age
economic century, initially in Europe and then in the from cancer. Mirroring these mortality
returns to rest of the world (see table). Economic his- changes are marked changes in her quality of
torians and demographers still debate the life. She can choose to have fewer pregnancies
better health genesis of these changes, but they increas- and spend less time raising children: from an
ingly point to rising incomes (and resulting average of 5.3 children in 1950, Chilean
improvements in sanitation and food avail- women’s fertility has dropped to 2.3 (barely
ability) as the major cause of declines in above replacement). She suffers fewer infec-
19th-century mortality rates. For the 20th tions and has greater strength and stature and
century, however, they believe technical a quicker mind. Her life is not only much
improvements were the catalysts— longer, it is much healthier as well.
particularly the discovery of the germ the- What has this improvement in population
ory of disease, a better understanding of health since the mid-19th century meant for
economies as a whole? And what does
the recent fall in life expectancy in
Living longer Africa and elsewhere as a result of the
Life expectancy rose sharply around the world in the second half of the 20th century, but HIV/AIDS epidemic portend? This
AIDS is undermining progress in Africa and elsewhere. article tries to answer these questions
by exploring the increasingly strong
Life expectancy, years
_____________________ Rate of change in years per decade
_____________________________ body of evidence showing that better
Region 1960 1990 2001 1960–90 1990–2001 health contributes to the more rapid
Low and middle income 44 63 64 6.3 0.9
East Asia and Pacific 39 67 69 9.3 1.8 growth of GDP per capita. The article
Europe and Central Asia n/a 69 69 n/a 0.0 also delves into recent studies that
Latin America and Caribbean 56 68 71 4.0 2.7
Middle East and North Africa 47 64 68 5.7 3.6 argue that past estimates of economic
South Asia 44 58 63 4.7 4.5 progress have been understated and
Sub-Saharan Africa 40 50 46 3.3 –3.6
High income 69 76 78 2.3 1.8 that recent economic losses caused by
World 50 65 67 5.0 1.8 HIV/AIDS are likewise being under-
Source: World Development Indicators 2003 (Washington: World Bank, 2003). stated if economists rely on GDP per
Note: Entries are the average of male and female life expectancies. Assignment of countries to regions uses the
World Bank convention for 2003 that is listed on the inside back cover of WDI 2003.
capita as a yardstick. A better indica-
tor would be “full income,” a concept
that captures the value of changes in

10 Health & Development

10
 Filipinos light candles to commemorate AIDS victims
while marking AIDS Day in Manila.

occurred in much of West Africa prior to the

successful control of river blindness. Yet
another channel is through boosting educa-
tion. Healthier children have higher rates of
school attendance and improved cognitive
development, and a longer life span can make
investment in education more attractive.
The initial beneficiaries of health improve-
ments are often the most vulnerable group:
children. Lower infant mortality initially cre-
ates a “baby boom” cohort and often leads to a
subsequent reduction in the birth rate as fami-
lies choose to have fewer children in the new
low-mortality regime. A baby-boom cohort is
thus unique and affects the economy pro-
foundly as it enters education, then finds jobs,
saves for retirement, and, finally, leaves the
labor market. The cohorts before and after a
baby boom are much smaller.
If better health improves an economy’s pro-
ductive potential, we would expect good health
to go hand in hand with higher steady-state out-
put. However, there may be a lag such that

life expectancy by including them in an assessment of eco-

Chart 1
nomic welfare. For Africa, this new yardstick sharply illumi-
nates the economic consequences of AIDS in the past 15
Health’s links to GDP
Poor health reduces GDP per capita by reducing both labor
years and signals catastrophe ahead.
productivity and the relative size of the labor force.
How health affects GDP per capita
Higher fertility Higher Labor force reduced
How does health influence GDP per capita? To begin with, and dependency by mortality and early
healthy workers are more productive than workers who are child mortality ratio retirement
otherwise comparable but for their health. One strand of sup-
porting evidence comes from studies on individuals that link
Lower
investments in health and nutrition of the young to adult GDP
wages. per capita

Better health also raises per capita income through a

number of other channels (see Chart 1). One way is by alter-
Adult illness
ing decisions about expenditures and savings over the life Child illness
Reduced labor
and
productivity
cycle. The idea of planning for retirement occurs only when malnutrition
mortality rates become low enough for retirement to be a
realistic prospect. Rising longevity in developing countries Reduced access to
has opened a new incentive for the current generation to Child
natural resources and
malnutrition
save—an incentive that can have dramatic effects on global economy
national saving rates. While this saving boom lasts for only
one generation and is offset by the needs of the elderly once Reduced schooling
Reduced investment
population aging occurs, it can substantially boost invest- and impaired
in physical capital
ment and economic growth rates while it lasts. Another cognitive capacity

channel is by encouraging foreign direct investment: Source: Ruger, Jennifer Prah, Dean T. Jamison, and David E. Bloom, 2001,
investors shun environments where the labor force suffers a “Health and the Economy,” p. 619, in International Public Health, edited by
Michael H. Merson, Robert E. Black, and Anne J. Mills (Sudbury, Massachusetts:
heavy disease burden. Endemic diseases can also deny Jones and Barlett).
humans access to land or other natural resources, as

Health & Development 11

 economies adjust gradually to their steady-state output level
Box 1
over time. In this case, we expect countries that have high levels
The East Asian “miracle” of health but low levels of income to experience relatively faster
economic growth as their income adjusts. How big an overall
There is a growing body of evidence that the East Asian contribution does better health make to economic growth?
countries that sustained high rates of economic growth in
Evidence from cross-country growth regressions suggests the
the second half of the 20th century did so largely thanks to
contribution is large. Indeed, the initial health of a population
high rates of growth of factor inputs—labor, physical capi-
has been identified as one of the most robust and potent dri-
tal, and human capital—rather than increases in total fac-
vers of economic growth—among such well-established influ-
tor productivity. One reason for the rapid increase in labor
supply per capita in East Asia has been the effect of better ences as the initial level of income per capita (once countries
health. Improvements in health, feasible at modest cost, reach their steady-state level of income, growth slows), geo-
preceded and helped catalyze the so-called miracle. Life graphic location, institutional environment, economic policy,
expectancy increased from 39 years in 1960 to 67 years in initial level of education, and investments in education. For
1990, with a concomitant decline in fertility. Declining example, Bloom, Canning, and Sevilla (Harvard University)
mortality and fertility rates meant that between 1960 and found that one extra year of life expectancy raises steady-state
2000 the ratio of working-age people (15–64) to the GDP per capita by about 4 percent.
dependent population (0–14 and 65 plus) rose from about But not all countries benefit equally from this link. Alok
1.3 to over 2, which facilitated a much higher input of Bhargava (University of Houston) and colleagues found that
workers per capita into production and a higher GDP per better health matters more for wages in low-income countries
capita. than in high-income ones. Studies also show that better health
Another key element in East Asia’s economic success sto- matters more for countries with good economic policies, such
ries was the region’s exceptionally high rates of capital as openness to trade and good governance. Work undertaken
accumulation, driven by saving levels that often exceeded by Bloom, Canning, and Malaney (Harvard University) con-
30 percent of income. Increases in longevity led to an cluded that the East Asian growth miracle was actually no mir-
increase in the need for saving to secure retirement income, acle at all: rather, it represents compelling evidence for a
as studies have suggested. Savings by individuals peak when process in which health improvements played a leading role in
they are between 40 and 65 and are preparing for retire- the context of generally favorable economic policies (Box 1).
ment, resulting in a savings boom when the baby-boom
cohort enters this age range. Not only did East Asia have a Virtuous and vicious circles
large fraction of its population in this peak savings age
Health improvements can spur economic performance, but
range, but also this cohort was the first in the region to be
causality also runs in the reverse direction. This reverse
living in a low-mortality environment and to be saving for
retirement on a large scale. causality makes estimating the causal effect of health on eco-
nomic performance difficult, but work in the area usually
identifies the effect through timing; using childhood health

Box 2
The “value of a statistical life” estimates of the value of a statistical life (VSL). (Viscusi and
Aldy, 2003)
How should governments evaluate the consequences of public
sector health, safety, and environmental interventions that If, for example, a worker requires (and is paid) $500 a year
reduce mortality risks? Over several decades, a substantial of additional pay to accept a more risky but otherwise similar
body of research has addressed this question by using infor- job, where the increase in the mortality rate is 1 in 10,000 a
mation from individuals’ choices about willingness to take year, the value placed on reducing risk by this magnitude is
risks. W. Kip Viscusi of Harvard University has closely tracked simply $500. The value of a statistical life is defined as the
this literature, and, in a recent overview, he and colleague observed amount required to accept a risk divided by the
Joseph Aldy provide a clear statement of the approach: level of the risk—that is, in the example we have chosen, the
VSL would be $500/(1/10,000) = $5,000,000, a number in the
Individuals make decisions everyday that reflect how they range of estimates for the United States today. Viscusi and
value health and mortality risks, such as driving an automo- Aldy provide a comprehensive overview of the methods used
bile, smoking a cigarette and eating a medium-rare ham- in this research and summarize results of 60 studies from 10
burger. Many of these choices involve market decisions, such countries.
as the purchase of a hazardous product or working on a risky Willingness to pay to avoid risks rises, not surprisingly, with
job. Because increases in health risks are undesirable, there income. A reasonable range of values for a country’s VSL
must be some other aspect of that activity that makes it attrac- appears to be 100–200 times GDP per capita, with values esti-
tive. Using evidence on market choices that involve implicit mated in richer countries more likely to occur toward the high
tradeoffs between risk and money, economists have developed end of the range.

12 Health & Development

An obstetrics ward in the Ethiopian capital, Addis Ababa.

and nutrition inputs as a determinant of adult wages or tak- differs: a country whose citizens enjoy long and healthy lives
ing population health in, say, 1960 as a factor influencing eco- clearly outperforms another with the same GDP per capita
nomic growth during 1960–95. More important, this but whose citizens suffer much illness and die sooner.
two-way causality can give rise to cumulative causality, with Individual willingness to forgo income to work in safer envi-
health improvements leading to economic growth, which can ronments and social willingness to pay for health-enhancing
facilitate further health improvements, and so on. While this safety and environmental regulations provide measures,
virtuous circle of improvements in health and income can albeit approximate, of the value of differences in mortality
continue for a time, it will eventually come to an end as rates. Many such willingness-to-pay studies have been under-
returns to health improvements diminish and demographic taken in recent decades, and their results are typically sum-
change leads to an aging population. marized as the “value of a statistical life,” or VSL (Box 2).
There is also scope, however, for vicious circles, with health Although the National Income and Product Accounts
declines setting off impoverishment and further ill health. include the value of inputs into health care (such as drugs
This pattern has been particularly evident in the former and physician time), standard procedures do not incorporate
Soviet Union, where male life expectancy declined sharply information on the value of changes in mortality rates. In a
during the transition from communism, and in sub-Saharan pathbreaking (but long-neglected) paper, Dan Usher of
Africa, where HIV infection rates are high and AIDS is Queen’s University, Canada, first brought the value of mor-
already dramatically increasing adult mortality rates. tality reduction into the economic analysis of national
The effect of HIV/AIDS on GDP per capita could eventu- income accounting. He did this by generating estimates of
ally prove devastating. There is an enormous waste of human the growth in “full income”—a concept that captures the
capital as prime-age workers die. A high-mortality environ- value of changes in life expectancy by including them in an
ment deters the next generation from investing in education assessment of economic welfare—for six countries and terri-
and creating human capital that may have little payoff. The tories (Canada, Chile, France, Japan, Sri Lanka, and Taiwan
creation of a generation of orphans means that children may Province of China) during the middle decades of the 20th
be forced to work to survive and may not get the education century. For the upper-income countries in this group, per-
they need. High mortality rates may reduce investment. haps 30 percent of the growth of full income resulted from
Saving rates are thus likely to fall, as the prospect of retire- declines in mortality. In the developing countries, where this
ment becomes less likely. And foreign companies are less was a period of particularly rapid mortality decline, full
likely to invest in a country with a high HIV prevalence rate income was influenced even more by mortality changes.
because of the threat to their own workers, the prospect of Estimates of changes in full income are typically generated
high labor turnover, and the likely loss of workers who have by adding the value of changes in annual mortality rates
gained specific skills by working for the firm. (calculated using VSL figures) to changes in annual GDP
per capita. Even these estimates of full income are conserva-
How health influences “full income” tive in that they incorporate only the value of mortality
Judging countries’ economic performance by GDP per capita, changes and do not account for the total value of changes in
however, fails to differentiate between situations where health health status.

Health & Development 13

 Box 3
The devastating economic impact of AIDS in sub-Saharan Africa

Life expectancy in Africa increased from 40 years in 1960 to 50 and convey a more accurate picture of the economic effect of
years in 1990, but the AIDS epidemic is reversing these gains. AIDS. They suggest that AIDS is already having a devastating
By 1990, infection with HIV had penetrated deeply into Africa, economic effect on Africa.
although the number of deaths remained fairly small (218,000 How is the change in full income resulting from the AIDS
out of an estimated 7,940,000 deaths in 1990, or 2.7 percent of epidemic assessed? It consists of two components: the change
the total). But by 2001, the number of AIDS deaths had in GDP per capita and the value of changes in mortality rates
climbed to an estimated 2,197,000, or 20.6 percent of total as estimated in the VSL literature. To obtain the latter compo-
deaths, with projections for continued increases. As a result, nent, the first step is to calculate the impact of AIDS on mor-
life expectancy has declined to 46 years. tality rates. By 2000, the epidemic had, on average, progressed
Despite this fall in life expectancy, however, many investiga- to the point that mortality rates (in middle ages) were begin-
tors have so far found little, if any, impact of the AIDS epidemic ning to increase substantially. In 1990, a 15-year-old male had
on GDP per capita in the region—pointing to the shortcomings a 51 percent chance of dying before his 60th birthday, and this
of GDP per capita as a measure of national economic well- had increased to 57 percent by 2000. For females, the increase
being. While GDP per capita may suffer in the long run as edu- was from 45 to 53 percent. (By comparison, in Japan, the com-
cation rates and savings fall because of high mortality rates, parable probability for females in 1999 was only 4.8 percent.)
AIDS has certainly created a human disaster in many countries Taking the average of the change in annual mortality probabil-
in sub-Saharan Africa. The measures of full income now enter- ities gives 0.35 percent a year from 1990 to 2000.
ing the literature—a concept that captures the value of changes The next step is to calculate the economic cost of these mor-
in life expectancy by including them in an assessment of eco- tality increases. Conservatively, using 100 times GDP per capita
nomic welfare—provide a quantitative indicator of this disaster as the VSL, Africa’s mortality changes imply an economic cost
of the epidemic approximately equal to 15 percent of Africa’s
GDP in 2000 (assuming that about 50 percent of the popula-
Chart 2
tion is aged 15–60 and that 90 percent of AIDS deaths are in
Differing yardsticks this age group). This corresponds to a decline in income of
Trends in full income tell a very different story about Kenya's 1.7 percent a year from 1990 to 2000, far higher than existing
economic performance than trends in GDP. estimates of the effect of AIDS on GDP.
(Average annual percentage change) Before 1990, in contrast, improvements in adult health led to
10 large economic benefits relative to changes in GDP per capita.
Full income per capita
GDP per capita The estimated effect adds several percentage points a year to the
5 GDP growth rate in many African countries during 1960–90.
This changes the overall perception of performance. Malawi, for
0
example, in the 1980s had a slightly negative growth rate of GDP
per capita, but a rather larger positive growth rate of full income
–5
that turned sharply negative in the 1990s. The chart illustrates the
–10 contrast for Kenya. To the extent that full income is a better indi-
1960–70 1970–80 1980–90 1990–2000 cator of overall economic performance than GDP per capita,
Source: Jamison, Sachs, and Wang, 2001. Kenya’s economic performance before 1990 has been significantly
underestimated and, after 1990, dramatically overestimated.

For almost 15 years, little further work was done on the a rate of 6.3 years a decade, whereas in the high-income coun-
effects of mortality change on full income (although the num- tries, the rate was “only” 2.3 years a decade.) In another
ber of carefully constructed estimates of VSLs increased enor- important paper, Yale University’s William Nordhaus assessed
mously). Two papers then appeared that kindled substantial the growth of full income per capita in the United States in the
new interest. Newly appointed World Bank Chief Economist 20th century. He concluded that somewhat more than half of
François Bourguignon and Christian Morrisson (University the growth in full income in the first half of the century had
of Paris) addressed the long-term evolution of inequality resulted from mortality decline, and somewhat less than half
among world citizens, starting from the premise that a “com- in the second half of the century. This was a period when real
prehensive definition of economic well-being would consider income in the United States increased sixfold, and life
individuals over their lifetime.” Their conclusion was that expectancy increased by a little over 25 years. Nordhaus’s
rapid increases in life expectancy in poorer countries had paper also provides a valuable summary of the theory and
resulted in declines in inequality, broadly defined, beginning methods of estimation of full income.
sometime after 1950, even though income inequality had con- Three lines of more recent work extend these methods to
tinued to rise. (The table on page 10 shows life expectancy the interpretation of the economic performance of develop-
increasing between 1960 and 1990 in developing countries at ing countries in recent decades, and all reach conclusions that

14 Health & Development

differ substantially from analyses based on GDP alone. Two of What are the implications of these findings for develop-
these studies—one undertaken for the World Health ment strategy and for benefit-cost analyses of public sector
Organization’s Commission on Macroeconomics and Health investment options? Using full income in benefit-cost analy-
(CMH) and the other at the IMF—assessed the impact of the ses of investments in health (and in health-related sectors
AIDS epidemic on full income. Both concluded that the AIDS such as education, water supply and sanitation, and targeted
epidemic in the 1990s had far more adverse economic conse- food transfers) would markedly increase our estimates of net
quences than its effects on per capita GDP would suggest benefits or rates of return. Currently, only about 10 percent
(Box 3). Gary Becker and colleagues at the University of of official development assistance (ODA) is committed
Chicago extended the earlier work of Bourguignon and directly to health. Given the highly efficacious and low-cost
Morrisson in finding strong absolute convergence in full technologies that exist for improving health (particularly in
income across countries over time, in contrast to the standard high-mortality settings), a careful, quantitative reassessment
finding of continued divergence of GDP per capita. Finally, of competing investment priorities for improving living
Jeffrey Sachs (Columbia University) and colleagues have standards will likely conclude that existing ODA and
extended the earlier CMH work by using standard cross- budgetary allocations to health are richly deserving of a
country growth regressions to model determinants of full substantial boost. ■
income (rather than GDP per capita). They also conclude
that economies have been converging in terms of full income,
and, tentatively, they find the determinants of growth in full David E. Bloom is Clarence James Gamble Professor of Economics
income to be similar to those of growth in GDP. and Demography and Chair, Department of Population
and International Health, Harvard School of Public Health.
Conclusion David Canning is Professor of Economics and International
The dramatic mortality declines of the past one and a half Health, Department of Population and International Health,
centuries—and their reversal by AIDS in Africa and else- Harvard School of Public Health. Dean T. Jamison is Professor
where subsequent to 1990—have had major economic con- of International Health Economics and of Education at the
sequences. The impact of health on GDP is substantial—an University of California, Los Angeles, and a Fellow at the
extra year of life expectancy is estimated to raise a country’s Fogarty International Center of the U.S. National Institutes
per capita GDP by about 4 percent, for example. The intrin- of Health. He was Director of the World Bank team that
sic value of mortality changes—measured in terms of the prepared World Development Report 1993: Investing
value of a statistical life, or VSL—is even more substantial. in Health.

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Health & Development 15