Abstract
Stylized facts show there is a clustering of countries in three balanced growth paths characterized by differing income/growth, human capital and incidence of infectious diseases. To explain this, we develop a dynamic general equilibrium model incorporating SIS epidemiology dynamics, where households choose how much to invest in human and physical capital, as well as in controlling the risk of infection. In the decentralized economy, households do not internalize the externality of controlling infection. There are multiple balanced growth paths where the endogenous prevalence of the disease determines whether human capital is accumulated or not, i.e., whether there is sustained economic growth or a poverty trap. We characterize the optimal public health policy that internalizes the disease externality and the subsidy that decentralizes it. Perversely, for countries in a poverty trap and most afflicted with diseases, the optimal subsidy is lower than for growing economies. We also study the quantitative effects of better control of diseases, and of increasing life expectancy on countries in a poverty trap.
Highlights
The stylized facts on infectious diseases and the macroeconomy are that there is a clustering of countries into three different groups: with high income, high human capital accumulation and almost no incidence of infectious diseases; with lower income, intermediate human capital and low incidence of infectious diseases; and countries in a poverty trap with no growth, low human capital and the high incidence of infectious diseases
There are multiple balanced growth paths where the endogenous prevalence of the disease determines whether human capital is accumulated or not, i.e., whether there is sustained economic growth or a poverty trap
We model the joint determination of the transmission of infectious diseases, human capital and economic growth in a dynamic general equilibrium model to generate three balanced growth paths, one of which is a poverty trap, consistent with these facts
Summary
The stylized facts on infectious diseases and the macroeconomy are that there is a clustering of countries into three different groups: with high income (and growth), high human capital accumulation and almost no incidence of infectious diseases (largely OECD countries); with lower income (and growth), intermediate human capital and low incidence of infectious diseases (developing countries); and countries in a poverty trap with no growth, low human capital and the high incidence of infectious diseases (largely in sub-Saharan Africa). We model the joint determination of the transmission of infectious diseases, human capital and economic growth in a dynamic general equilibrium model to generate three balanced growth paths, one of which is a poverty trap, consistent with these facts. To study the effect of this externality and contrast the competitive situation (based on private health expenditures) from the effect of public health policy, we study the centralized economy where a social planner takes the disease externality into account In this case, the effective health capital is higher, and typically human capital accumulation and the growth rate are higher.. The optimal subsidy is proportional and increasing in the size of the disease externality It depends on whether human capital is being accumulated or whether a country is growing or not.
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