The effects of health conditions on financial sector development

Abstract

The relationship between the financial sector and health sector has been under investigated in the literature. Based on the efficiency wage theory, one can conjecture that a healthy worker, unlike the unhealthy one, can work, save, and contribute more to widening the financial sector. Using panel data over the period 1995–2016, we examine whether improvements in health conditions can help explain the expansion of the financial system in Sub-Saharan Africa. The results indicate that better health conditions contribute to financial development. Specifically, higher life expectancy, lower infant mortality, higher health expenditure, and lower out-of-pocket expenditure significantly contribute to financial sector development. These results suggest that better health conditions increase domestic savings and foster financial development. The study, therefore, enhances the importance of health status and spending on health infrastructure in economic development and calls on policymakers to invest in human health.