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China Economic Review

Volume 23, Issue 4, December 2012, Pages 1104–1119

Cover image

Cover image

Health investment, physical capital accumulation, and economic growth

,

,

, ,

a Department of Applied Economics, Guanghua School of Management, Peking University, Beijing 100871, China

b Department of Decision Sciences and Managerial Economics, The Chinese University of Hong Kong, Hong Kong, China

c Department of public Economics, School of Economics, Fudan University, Shanghai, 200433, China

Received 18 November 2011, Revised 16 June 2012, Accepted 16 July 2012, Available online 21 July 2012  

Abstract

This paper analyzes the effect of health investment, and hence of health capital, on physical capital accumulation and long-run economic growth in an extended Ramsey model with an Arrow–Romer production function and a Grossman (1972) utility function. The paper concludes that economic growth is related to both the health growth rate and the health level. While growth in health capital always facilitates economic growth, the gross effect of health level on the rate of economic growth depends on how it affects physical capital accumulation. If the negative effect of health on economic growth through its influence on physical capital accumulation is not taken into consideration, then health level has a positive effect on the rate of economic growth by improving the efficiency of labor production. However, since health investment may crowd out physical capital investment and thus influence physical capital accumulation, excessive investment in health may have a negative effect on economic growth. Empirical tests of these theoretical hypotheses using panel data from individual provinces of China produce results that are consistent with our theoretical conclusions.

Highlights

► We analyze the effect of health investment on long-run economic growth. ► Economic growth is related to both health capital growth rate and health capital stock. ► Health capital growth rate always facilitates economic growth. ► Health capital stock effect depends on how it affects physical capital accumulation.

JEL classification

E2;

I0;

O1;

O4

Keywords

Health investment;

Health;

Economic growth;

Physical capital accumulation

 

We would like to thank Jianfang Yang and Zhigang Wang for generously providing us with the data they have collected. This project is supported by the Shanghai Leading Academic Discipline Project, Project Number: B101.

 
  Corresponding author at: Room 604, School of Economics, Fudan University, No. 220, Handan Road, Shanghai, Zip Code: 200433, China. Tel.: + 86 21 55665321.  

Copyright © 2012 Elsevier Inc. All rights reserved.

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