CHAPTER 2 LITERATURE REVIEW2.0 Introduction The purpose of this study is to investigate the effect of health expenditure on GDP. This section contains a review of theoretical frameworks and empirical evidence about the effect of health expenditure on economic growth in different countries.
According to World Health Organization (WHO), health does not only refer to the absence of disease or infirmity but also defined as a state of complete physical, mental and social well-being. Later in 1986, World Health Organization had further clarified the definition of health as “a resource for everyday life, not the objective of living. Health is a positive concept emphasizing social and personal resources, as well as physical capacities”. An online medical news website, Medical News Today has similar definition of health as World Health Organization in 1946.
Besides physical well-being, Medical News Today stated that health also refers to a state of complete emotion. Medical News Today had classified health into two types which are physical health and mental health. Physical health can obtained by having regular exercise, balance nutrition and adequate rest in daily life. A healthy lifestyle can reduce the risk of being ill, injury and other health issue that helps to maintain physical fitness that leads to physical health. Besides physical health, mental health is also important because it reflects a person’s emotion, social, and psychological wellbeing. Mental health depends on the ability to enjoy life, feel safe and secure, adapt to adversity, achieve potential, and have positive thinking.
Therefore, physical health and mental health are equally important for a human’s body to function at the peak performance. According to Central Intelligence Agency, an independent government agency stated that health expenditure is the total expenditure that public sectors and private sectors spend on healthcare. Health expenditure is defined as the activities performed by institutions or individuals to promote, restore, or maintain health. The activities performed include the application of medical, paramedical or nursing knowledge and technology. Health Expenditure Report which published by Malaysia National Health Account from 1997 to 2014 stated that the healthcare service is provided by hospitals, providers of ambulatory health care, general health administration and insurance, provision and administration of public health programmes, institutions providing health related services, retail sale and other providers of medical goods, other industries such as rest of the Malaysian economy, rest of the world, nursing and residential care facilities. The services provided are curative care, health program administration and health insurance, prevention and public health services, capital formation of health care provider institutions, education and training of health personnel, medical goods dispensed to out-patients, ancillary services to health care, research and development in health, services of long-term nursing care, and all other health-related services. According to the Chai, Whynes and Sach (2008)., fundamental principle of Malaysia health care system is the ability to pay that will not affect the health care especially in the event of sickness.
Malaysia government understand that health represents human capital thus Malaysia government is concerned with the healthcare system and aimed to improve the health of nation. Malaysia practices a dual healthcare system which are public and private healthcare systems. Ministry of Health is the main public health provider in Malaysia which owned various type of health facilities to provide primary, secondary and tertiary care to citizens. In 2005, Ministry of Health has provided 122 hospitals, 6 special medical institutions, 809 health clinics, 1,919 rural clinics, 89 maternal and child health clinics, and 146 mobile clinics. Due to the subsidy from government, the primary health care services provided at clinics only charge RM1 for the diagnosis and medicine. Beside that, Malaysia government also provides high subsidy for secondary and tertiary health care service. For an example, 98% of health services cost provided by Ministry of Health in 2005 had subsidized by Malaysia government.
For the private healthcare system, the focus point of providers will be on the curative services. In 2004, there were 218 private hospitals, and about 5,000 private general practitioner clinics available in Malaysia. Healthcare services provided by private sector were expected to be high quality because they equipped the latest technology health care machines. However, the facilities of private sector are monitored and regulated by Malaysia government to ensure their facilities’ standard and quality services can fulfilled the requirement of National Quality Assurance Programme. Different from the public sector which only charged patient for RM1, user fees will be charged on patients according to treatment and services taken in private sector.
As a comparison, charges in private health service will be higher compared to the public health service which is highly subsidised by government. Therefore, World Health Organization has divided total health expenditures into two sources of funds which are public source and private source. All government agencies and the donation from public to government agencies are counted as the public source of health expenditure. Based on Health Expenditure, sources from public sector in Malaysia has been classified into 9 categories. The public sector sources are Ministry of Health, Ministry of Education, Social Security Organization, Ministry of Defence, Employee Provident Funds (EPF), State Government, local authorities, other federal agencies and state agencies which also including the statutory bodies. General taxes regardless direct or indirect taxes also collected by the Ministry of Finance to finance the public health care services.
Moreover, Malaysia citizens can withdraw 30% from their Employee Provident Fund for health care expenditure and the rest of 70% are the saving for contributing his or her family in the old age. Besides, workers who injured during their working hours can get the medical benefits from Social Security Organization. Thus Employee Provident Fund and Social Security Organization are considered as the financial source of public health care. On the other hand, private sector sources have been divided into 6 categories. The private sector sources come from private household out-of-pocket (OOP) expenditures, private insurance enterprises which is other than social insurance, all corporations which is other than health insurance, private managed care organizations and other similar entities and non-profit organisations serving households. Households use out-of-pocket (OOP) payment to purchase healthcare service such as surgery in hospital or purchase health service from third party such as non-government organization, insurance and parties other than government. Another private health care service finance source is private insurance.
Different from the public health care service finance sources as stated above, citizens are voluntarily to purchase private insurance. The type of health insurance and level of coverage demand from citizens will lead to different premiums of insurance. Therefore, citizens purchase health insurance as a protection so they will have enough fund to purchase health care service when they are ill or for health improvement. Citizens can choose affordable health insurance plan based on their needs and income.2.
1 Theoretical Framework Health status of a person is as human capital because it will directly affect on labour productivity and relative to economic growth. This is because healthy citizens and labour are more efficient and can lead to an increase of productivity of a nation. Higher productivity of nation is cause by healthier labour and it leads nation toward high income level. Statistical method have also shown that a productivity difference is the large part of the effect of health on rising earning (Todaro and Smith,2011). Bloom and Canning (2012) stated that healthy labour possess greater physical energy and dexterity lead the higher productivity of nation.
The fact has shown a reverse causality between higher wages and better health. Due to the fact, healthier labour are more productive than sick labors, thus allow healthier labour to obtain better paying jobs and tend to spend more on health care to maintain their health. According to the researcher, there have 4 factor how healthier individuals affect the economics trend:• They are more productive and earn higher income • They spend more hours in the labour force compare to less healthy labour that take sick leave• They spend higher income to invest in their own education and health, which will improve their productivity• They save more in anticipation of a longer life after retirementTherefore, healthier population will contribute more on productivity and lead to an increase in GDP level.
According to Konchitchk and Patatoukas (2014), gross domestic product (GDP) is defined as “the key summary statistic of economic activity and the most important variable on analyses of economic”. Gross domestic product has multifunction such as preparing federal budget, formulate monetary policy, indicator of economic activity, and key input for production, investment, and employment decisions. Gross domestic product can be calculated by income approach which total up the corporate profits, employee compensation, and taxes on production and imports. Health expenditure is one of the important factor contributing to the rise of GDP in Malaysia.
Relationship between HE and GDP Healthcare expenditures are ordinarily hypothesized to be a function of real per capita gross domestic product (GDP). There are some reasons to suggest this could be a bilateral relationship, as it can be reasoned that population health is an input to the macroeconomic production function. There are some reasons how a bilateral relationship between healthcare expenditures and real per capita income could exist. First, by definition, health expenditure is a function of resources available (income or wealth). Second, a reverse causation, income as a function of health expenditures and it also has a theoretical basis due to the fact that the latter is a determinant of (i) human capital, (ii) labor supply and productivity. If health expenditure can be regarded as an investment in human capital, and given that human capital is an “engine” of growth, an increase in health expenditure will ultimately lead to higher income achievements. Similarly, rises in health expenditures make possible higher labour supply and productivity, which eventually must give way to a higher income.
Economics Growth Model The theoretical structure of traditional neoclassical grow model from Lucas(1988), Romer (1990), and Solow(1956) have described two growth theories which are the exogenous and endogenous growth in economics growth model. According to the Solow model stated that the explicitly human capital is the key resource that affect the country’s economic growth. From his model, he explained that a useful expression for output per worker, where each stock (per worker) serves to a rise in production, thus the more production inflow to the market will lead to more stable economy growth. When rate of change of capital-labour ratio (?) equals to zero shows that capital-labour ratio (r) is constant. In the other word, expanding rate of capital stock and labour force are the same and we named it as n. Figure above shows two curves which are nr and sF(r,1). nr is a function which crossing origin with slope n while sF(r,1) is another element from differential equation involving capital-labour ratio ? = sF(r,1) – nr. When nr = sF(r,1), ? = 0, and r* should never be established, capital and labour will grow in proportion.
With the constant scale, real output will grow at the same rate as capital stock and labour force which is n, output per worker will be constant. However, if r is larger than r*, which is to the right of intersection point, nr is larger than sF(r,1), r will decrease toward r*. If r smaller than r*, which is to the left of intersection point, nr is smaller sF(r,1), r will increase to r*. Thus r* as an equilibrium value is stable.
Whether the initial value of r is larger or smaller than r*, system will also try to achieve balanced growth at natural rate. If initial value of capital stock is lower than equilibrium ratio, capital and output will grow faster than labour force. If initial value of capital stock is higher than equilibrium ratio, capital and output will grow slower than labour force. The growth of output is always in the middle level of labour and capital. Lucas (1988) and Romer (1990) have determined that the endogenous growth model development as an alternative approach in 1980s. The model explained that the capital is unlimited to the physical capital and through health and education to enhance and developing labour’s knowledge, skills, abilities and experience. Later, Lucas (1988) and Romer (1990) take into account human capital through education stock for the former with technology and research and development (R;D.
Human capital is considered as a positive externality on capital productivity and its accumulation favourably influences economic growth and welfare of a community. In short, human capital is the stock of knowledge, competence, health, training, including creativity and other investments, embody the ability to perform labour tasks more productively. On the other hand, human capital formation refers to the process of acquiring and increasing the number of people who have the skills, good health, education and experience that are critical for economic development. Although human capital is multifaceted, many theories explicitly connect investment in human capital development to education and occult the other aspects, mainly stock and investment in health.
However, health also plays an important role in human capital accumulation and is closely connected to education. For instance, a healthy population is easy to educate and the efficiency of people to produce human capital is also high. Besides, Lopez-Casasnovas et al. (2005) , also mentioned that “sustainable growth depend on increased human capital shocks due to a better education, a higher level of health and the new learning-application process.” According to Theodore (1961), young workers entering labour force have an advantage compared to old workers due to differences in productivity connected with human investment such as health condition and education. Labour who have higher education level, skilled and healthy can earn more than the labour who have lower education level, unskilled, and in poor health.
Relationship between HE and Income There are many studies investigated the relationship between income and health expenditure that affects GDP growth. Income is the most important factor that responsible to explain the level of variation and also the growth of the health expenditure in Malaysia. Health expenditure is a luxury good with an income elasticity (Kleiman, 1974; Newhouse, 1997; Parkin et al.
, 1987; Gbesemete and Gerdtham, 1992; Gerdtham et al., 1992a,b). People with higher income tend to spend more in health care. Hence, this explained that income is a main contributing factor in describing the variation on health expenditure and the variation on health expenditure leads to changes in GDP. Determinant of HE: Technological progress According to Newhouse (1992), technological progress is one of the key factor to explain the variation on health expenditure that affects GDP.
Baker and Wheeler (1998) and Weil (2007) proposed that several proxies has been used in the past studies, such as surgical methods and specific equipment, health care specific research and development expenditure (Okunad and Murthy, 2002); infant mortality and life expectancy at birth (Dreger, 2005); time index as a proxy for the impact of technology change (Gerdtham and Lothgren, 2000); time-specific intercepts (Di Matteo, 2004). According to Bodenheimer (2005), there is a major improvement in the health related to the technologies but in general it increases the health care cost. In addition, based on Lubitz (2005), a new low cost per patient per year technology to the health care system roses the spending on health and health care because there are more people being treated. Meanwhile, Newhouse (1992) said that, the medical care technology is having a fast improvement and spread easily into the health care system were majority responsible factor for the expenditure in health care grow up and thus GDP rises.
Determinant of HE: Medical technology However, according to Serenson (2013), in between the medical technology and health expenditure there is a conflict and complicated relationship. The survival rates rose in health care technology while the cost that related to the health care had increased rapidly in ratio to GDP (Chandra and Skinner, 2012). Budget decision are more relevant for the expenditure growth. Furthermore, Tong (2009) has investigated that they used the co-integration and causality tests on health income nexus for Malaysia. But, there is an essential evidence saying that health expenditure and the real income for Malaysia remain controversial. Health care technology increased survival rates on one hand, but on the other hand it has rapidly increased the cost pertaining to health care as a ratio to GDP (Chandra and Skinner, 2012). Increased life expectancy is a measure of technological changes, which enhances labour force skills and efficiency. The more the skilled and technologically well-versed labour forces the more the efficiency which ultimately increase GDP per capita.
Determinant of HE: Aging population Furthermore, past studies has broadly investigated the impact of aging population on health care spending growth (Zweifel et al., 1999; Hogan et al., 2001). According to United States Congressional Budget Office (2007), generally aging population expected to be the most important factor in health care system and health expenditure in the future.
Based on Kinsella and He (2009) and U.S. Census Bureau (2014), by year 2020 Malaysia will become an ageing society where the population in Malaysia’s from age 65 years or older that will reach 7%. There is non-significant impact of aging population were found on total per capita health expenditure (H00ver et al., 2002; Tchoe and Nam, 2010). However, Breyer and Felder (2006), Schulz et al. (2004), Ogura and Jakovljevic (2014) and Khan et al.
(2015) has identify that aging population contribute a factor that makes the health care cost accruing. In short run, there is a positive relationship between the aging and health expenditure (Bech et al., 2011). The total of health care spending and the health expenditure are elderly growing (Hakkinen et al., 2008; Mao an Xu, 2014). However, according to Palangkaraya and Yong (2009) found that aging population is negatively related with aggregate health expenditure. In addition, the population growth are expected to decline further to one percent from 2020 to 2030 period. Based on MOH (2013), total fertility rate are represents the number of children that would be born to a woman if she were to live to the end of her childbearing years and bear children in accordance with current age-specific fertility rate.
According to Leu (1987) and Cuyler (1988), the age structure of population was identified as a key indicator to explain changes in health expenditure across the nations. It explained that the population share are less than 15 years and above or up to 75 years of age estimated in the model while explaining the changes in the health expenditure per capita. Li Huang (2009) studied that the production function has a relationship between per capita real GDP growth and the physical capital, human capital and health investment.
Effect of Health Expenditure In the multiplier theory effect, increased health expenditures generate an increase in the total expenditures in Gross Domestic Product (GDP) and aggregate demand in healthcare. In addition, the increased health expenditures leads to a rise in the employment in health sector due to the aggregate demand and supply significantly climb up. At the same time, the total income of the employed increases and help contributes to the total expenditures and increases aggregate demand. According to Serdar Kurt (2015) mentioned that “the health expenditures on total expenditures, aggregate demand, and total production are termed direct effect and which the effect is positive.”3.0 Empirical Evidence There are several studies have been done on the effect of health expenditure on GDP growth.
One of the study by Aguyo-Rico and Iris (2010) examined the effect of health on economic growth for European, African, American, and Asian countries over a period 70s, 80s, and 90s using ordinary least square method of analysis and found that health capital has great effect on GPD growth, especially with a variable that captures all the determinants of health. Moreover, other studies such as Martins (2005), Strauss and Thomas (1998), Greiner (2005) and Agenor (2007) conducted on other countries shown that health expenditure is positively related to GDP. Furthermore, Bloom et al (2012) determined an aggregate economic growth production function as a function of labour, human capital and capital stock. The importance of results represent that healthy labour has positive effect on GDP growth.
Based on Zahra Mila Elmi and Somaye Sadeghi (2012) studies, health is a capital and investment on health can increase income and lead to the economics growth in overall. The healthier people the more productive because they can develop their skill and knowledge to enjoy the benefit in long term. Fuch (1996) specifies that 85% of the scholar in United States in the field of health economics approved that “technical change” that has been suggested by Newhouse has showed rapid growth of health care expenditure in the United States in past three decades. According to microeconomics views, if the income of an individual’s low (poor), the demand for the medical care also getting low. Since this happened, the marginal rate of return to invest in health for thru medical care is high.
In this study, Baltagi and Moscone (2010) have reconsidered that the long-run economic relationship between health care expenditure and income using a panel of 20 OECD countries during 1971-2004. On top, they have studied the non-stationery and co-integration properties between health spending and income. The empirical procedure categories into two part which first is panel regression analysis and second is the quantile regression analysis. The estimation showed that the expenditure growth will stimulate economic growth. However, the expenditure growth will reduce due to the economic growth. The method this study using are collect data annually from World Bank which the period was 1990-2009. they used the co-integration test which has some testing methods, the panel v-statistic, panel p-statistic, panel PP-statistic, panel ADF statistic, group p-statistic, group PP-statistic and group ADF statistic. From the testing method, it shows that economic growth plays potential role to expand the health care spending in long-run.
Furthermore, in long-run in developing countries the health spending increases due to engine of economic growth. The economic performance of a country could conceivably be enhanced by improving health of the citizens. Based on the life expectancy-income relationship by Preston (1976), the extent to which additional resources should be invested in health is likely depend on the GDP of the country. The analysis of growth rates would be more reliable if the use of two GDP series led to similar results. First, we developed a framework for modelling the inter-relationships between GDP growth rates and explanatory variables by re-examining the life expectancy-income relationship. It argued that, while the effects of ASR are likely to taper off at relatively low GDP levels, a broader view of health entails focusing on human development, including the formation of human capital. Nutrition and learning are essential components of human development.
Factors such as improved nutrition, better sanitation, innovations in medical technologies, and public health infrastructure have gradually increased the human life span. More generally, economic development depends on the level of skills acquired by the population and on capital formation. The former is influenced by child nutrition, educational infrastructure, and households’ resources, including parents’ physical health and cognitive attainment (e.g. Fogel, 1994, Scrimshaw, 1996, Bhargava, 1998a, 1999a). Capital accumulation depends on the savings rate that is also influenced by adult health. On the basic of the model, we can consider that education and health play a vital role in terms of the quality of human capital.
Therefore, expenditures on the education and health can improve the human capital quality level and it lead to the positive contribute to economic growth. From the study by Sorkin (1977) have examined the effect of health on economic growth, he mentioned that healthy people can contribute more production in the market and the deceased in birth rate have positive effect on the economic growth and GDP. On the other hand, Taban (2006) and Sunde (2009) also examined the relationship between economic growth and life expectancy at birth, from the fact the decrease in the birth rate can decline the human capital contribute to the economic growth and it can cause of sustainable loss growth. If the population of the country is small, the production level of the country will be limited. Besides, OECD have mentioned the decrease in mortality rate under 40 years old lead the increase growth in economics. According to Sefa Awawoyi Churchill, Siew Ling Yew, Mehmet Ugur (2015) studies, they re-assess the growth effect of government education and the growth effect of government health expenditure.
In this study, they found out the effect of government education expenditure on growth is positive where a negative growth effect observed on the government health expenditure. They obtain positive growth effect by combining the measure government expenditure on education and health. Grossman (1972) proven that an increase in health capital will reduce the time lost to illness and it allows more effective performance that will increase in productivity. It is supported by Strauss and Thomas (1998) about the relationship between productivity and health.
There is most empirical study that examine government health expenditure have a negative or in other word not significant effect on growth. The method this study used is the meta-analysis of economics research network (MAER-Net), where it reflects transparency and the best practice in meta-analysis. Econometric specification used in primary studies often and it is based on the certain underlying theoretical models. They examine that if its underlying the theoretical models it effects the government expenditure health growth association. Also, controlling this studies base on their specification on the endogenous growth models but excluding studies that adopt the Solow-type growth model. The explanation that suits this study is government health expenditure crowds out the other factors where its contribute to growth or public resources that allocated inefficiently in the health sector.
In other words, quality of the government health expenditure overall is low. Based on Lin Li, Maoguo Wu, Zhenyu Wu (2017), the potential factors that impact the regional economic development is the study of the relationship between public health expenditure and its appear to become more n more important. In this study, its mention about Shandong health expenditure which is higher than in Jiangsu based on statistics. But, it is because of the large population the average of public health expenditure of Shandong a lower than Jiangsu.
According to Mayer et al (2008) and Muysken (2008) argue that health has a positive effect on economic growth, where healthy life is a requirement of an effective labour force and by measuring the roles of several aspects in promote this economic growth. According to Lin Li, Maoguo Wu, Zhenyu Wu (2017) study, Mohapatra and Mishra (2011) states the growth of Gross State Domestic Product (GSDP) will cause an increase in health expenditure in both long-run and short-run, but the health expenditure only effect GSDP in long-run. So, the GSDP can affect the health expenditure only in short-run. Theoretical model that been used in this study are based on the Constant Elasticity of Substitution production function (CES) and only considers capital, labour and technology in the production function.. According to Elizabeth N. Appiah (2017), in developing country well-being they does not only apply the poor health, but it is a global matter.
In addition, because of the low level of health expenditure as a percent per capita GDP in developing countries, the communicable diseases such as tuberculosis and diarrhoea where it recognizes with no borders, as to remain an ever-emerging threat to those in developed countries, as much they do in developing countries. In this study, Fazaeli et al. (2016), argue that investment on health in GDP in developed countries are larger than in developing countries. This imply on the level of economic growth increases as well as the health expenditure growth.
The study uses panel data of 139 developing countries with period 1975-2015 which is 35 years. This is from the World Development Indicator(WDI) data from World Bank (2017). This study also uses Keynesian modelling which hypothesizes the expansion in government spending stimulate the economic growth. Even though this theory did not follow the policy maker, it is still believe that the increase in government spending have a positive effect on GDP growth. Elizabeth N. Appiah (2017) found that the total expenditures as a percent of gross domestic product (GDP) has a positive effect on the total output and also makes the impact increased in aggregate demand and expenditure. Appiah And McMahon (2002) also exposed that the non-monetary benefits of investment in education have an indirect effect on better health.
The health expenditure in developing countries cannot make a positive impact on per capita GDP growth if the investment in health are not stabilized. Therefore, government have set the budget on the health sector to improve the public and private health care in order to produce huge number of healthy human capital that can contribute more production to increase the economic growth. According to Hashmati A. (2001) has stated that the health expenditures in developing and developed countries have great impact on economic growth.
From his observation, he used Solow growth model to investigate the effect of the health expenditures on the economics growth based on sample of OECD countries from 1970 to 1992, in the result he concluded that there is a positive relationship between health expenditures and growth. Based on Li Huang (2009) studies between per capital real GDP growth and the physical capital, human capital and health investment in production function. Muskin (1962) showed that human capital can be accumulated through improvements in health and capacity of work suggesting that improved nutrition and health status affect labour productivity positively.
Investment in health care is found to have positive effects on economic growth as a healthy nation have higher productivity. It should be noted that the proxy for investment in health capital is the proportion of income spent on health, while Knowles and Owen used life expectancy to proxy heath capital. Hence, health care expenditure per capita is an appropriate proxy for investment in health. Makiew et al.
(1992) found that human capital accumulation can potentially alter the theoretical or empirical analysis of economic growth. Leaving out human capital affects the coefficients on investment and population growth. Analogously a disaggregation of capital into physical, human and health capital investments has both theoretical and empirical implications. The coefficient of initial value of GDP is negative indicating positive relation between growth and the initial distance from the steady state. The coefficient of investment in capital is positive showing that growth is an increasing function of saving. The coefficient of human capital is unexpectedly negative and insignificant. However, most of the studies still remain question how health is created.
Odusola (1998) has investigated the correlation between investment in human capital and growth of economic activities. He used Nigerian data and discovered the health expenditure on economic growth and GDP over the period 1985-2009. He documented that the funds are properly appropriately expended to both the recurrent and capital project in health. He concluded that the existence of a positive relationship between health and GDP growth will be more widened. The regression accounted for 92% of the sample variation on health expenditure and showed that the fraction of expenditure devoted to health care of total GDP increases with GDP. In an Engel curve context, this implies that health care is a ”luxury” good, and Newhouse concluded that at the margin health expenditure buys ”care” rather than ”cure”. Based on Guisan (2009), countries with high levels of health expenditure per capita is linked with the quality of health services and gives a positive impact on health indicator on life style. Generally, health expenditure increases and the outcome will be positive effect on health and life satisfaction.
In further review by Khan H. N., Razali R. B., and Shafie A. B. (2016) have concluded that the population growth and population structure have negative effect on health expenditure, as the hypothesis showed the income per capital have significant impact on health expenditure with income elastic for health expenditure 0.
999 ; 1. Thus, when the population become larger, the income per capital that citizen have will be lesser compare with the smaller population income per capital. Lastly, according to Kar and Taban (2005) determined that the relationship between health expenditure and economics growth by using co-integration method is opposite. Therefore, the relationship between health expenditure and economic growth is versa vice and is difficult to confirm. It depends on the different methodology, data, country group, period and result used to investigate.
Conclusion Malaysia is one of the Southeast Asian countries which have fast growing and high middle income economy country. According to the World Health Organization (WHO) stated that Malaysia have spent a total of US$ 938 billion in healthcare with a great growth rate of more than 4.49% in health expenditures.
In 1997 and 2012, there are out of 4.49% of GDP on its total health expenditure. Based on the Malaysia Ministry of Health report (MOH) (2014), the share of health care financing expenditure was separate as 44% from MOH, 37% from out of pocket, 7% private insurance and 4% from other health federal agencies. The growth of health expenditure is 4.49% when compared to the annual GDP growth rate of 6%. From the data it represents that the constant increase in health expenditure growth rate, however, it might have negative impact on the growth process of economy become slow. In addition, the situation may lead to a burden on country’s GDP in the form of deficit budget in health care sector and citizens may suffer for the out of pocket expenditure on health care. According to Getzen (2014), money spending and health care expenditure relationship has long been established.
Better health has been identified as an important factor to raise economic growth and increased productivity. A healthy population of any country is of important importance and has positive connections to economic growth (Sachs, 2002; Khan et al., 2015). However, rapidly growing of health care expenditure is a matter of serious concern. The fast growth rate of health care spending exerts pressure on various sectors of the economy, which might slow down the economic growth sustainability (Jakovljevic and Milovanovic, 2015; Jakovljevic, 2016) create poverty trap, as more out-of-pocket health expenditure hugely affects household income (Khan et al., 2015).
Furthermore, rapid population growth has raised serious concerns about the improvements in health status of the general public, health care systems’ financial sustainability, both in developed and developing countries as well. The increasing trend of health care expenditure in Malaysia has be a serious concern for policy makers and decision makers. There is a mutual relationship between the population’s level of health and its economic growth and development level.
A great health status and circumstance enable a country’s sustainable growth and development. At the same time, the level of growth and development contribute to the new health care technology access to the population and provide better health treatment. Therefore, the share of the population of healthy individual rises, production contribute by the human capital improves, loss of human capital does not exist and thus the number of the labour supply in the market increases.
Due to the fact, people who are healthy mentally, physically and spiritually are expected to provide more production than the disabled and sick people, thus more productivity emerge in the market and have a positive effect on the economic growth. In summary, all the review on the correlation between health expenditure and economic growth provided the fact that both variable are positive and significant effect of health expenditure on economic growth. However, it may depend on the magnitude of the government budgetary to health sector Lastly, the findings of the paper provide an insight to the policy makers that health expenditure play a significant role in the economic development of Malaysia. Therefore, to create healthy, efficient, technologically skilled and productive labor force it is suggested that encouraging HCE policies be adopted in Malaysia. Based on Culyer (1989) and Di Matteo (2003), health expenditure is being a necessity, this stresses the role of government control and intervention in the delivery of health care. Ministry of Health Malaysia (MOH) should provide basis health facilities as well as promote health education to the common people of the country with a special emphasis on rural health.Schultz T.W.
(1961). Investment in Human Capital. The American Economic Review, 51(1), 1-17.
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