Health and growth: causality through education

Abstract

PurposeThe paper aims to theoretically and empirically investigate the impact on human capital investment decisions and income growth of lowered life expectancy as a result of HIV/AIDS and other diseases.Design/methodology/approachThe theoretical model is a three‐period overlapping generations model where individuals go through three stages in their lives, namely, young, adult, and old. The model extends existing theoretical models by allowing the probability of premature death to differ for individuals at different life stages, and by allowing for stochastic technological advances. The empirical investigation focuses on the effect of HIV/AIDS on life expectancy and on the role of health in educational investments and growth. Potential endogeneity is addressed by using various strategies, such as controlling for country‐specific time‐invariant unobservables and by using the male‐circumcision rate as an instrumental variable for HIV/AIDS prevalence.FindingsThe paper shows theoretically that an increased probability of premature death leads to less investment in human capital, and consequently slower growth. Empirically, the paper finds that HIV/AIDS has resulted in a substantial decline in life expectancy in African countries and these falling life expectancies are indeed associated with lower educational attainment and slower economic growth world wide.Originality/valueThe theoretical and empirical findings reveal a causal link flowing from health to growth, which has been largely overlooked by the existing literature. The main implication is that health investments that decrease the incidence of diseases like HIV/AIDS resulting in increases in life expectancy through their complementarity with human capital investments lead to long run growth.