PPS603 Microeconomics of International Development Policy

1. PPS603Microeconomics of International Development Policy 6. Labor 6.2. Health

2. Introduction In this section, we continue our investigation of the second important input of the aggregate production function, i.e., labor. We’ll do so this week by looking at the “production” of health and at broader public health issues in developing countries.

3. Health and Constraints to Consumption Smoothing Health is a dynamic process. In other words, the production of it takes time. That is why we have long-term measures like the height-for-age z-score (HAZ), which is a measure of stunting that measures chronic malnutrition. It thus makes sense to explore the dynamics of food consumption’s relationship to health and income.

4. Health and Constraints to Consumption Smoothing In the standard life-cycle model of consumption, consumption each period depends on permanent income, i.e., ct = E(y), where c is consumption, and y is income, such that yt = E(y) + ε. In other words, consumption only varies because of random shocks to income. This is Friedman’s Permanent Income Hypothesis (PIH): consumption is determined by expected – not current – income, and transitory income shocks have little impact on consumption

5. Health and Constraints to Consumption Smoothing This relies on the existence of perfect credit markets and strong intertemporal substitutability in welfare. Why perfect credit markets? Think about your life as a student. Do you really live like someone whose income is less than $20,000 a year? Your consumption is often a function of your expected future income, because you can borrow against such future income.

6. Health and Constraints to Consumption Smoothing We know, however, that there is a great deal of credit rationing in the world, and not just in developing countries. Moreover, there exist health irreversibilities. To take an extreme example, death by starvation today cannot be compensated by banquets tomorrow. To take a less extreme example, iodine deficiency in children can lead to mental retardation, which cannot be cured.

7. Health and Constraints to Consumption Smoothing Moreover, recent work in behavioral economics has shown that individuals exhibit nonstandard behavior when it comes to trading off utility tomorrow for utility today. See O’Donoghue and Rabin (1999, 2001) for an economic theory of procrastination. You today is not the same person as you tomorrow. The microeconomics of (changing) Netflix queues. See also Della Vigna and Malmendier (2006): “Paying not to go to the gym.”

8. Health and Constraints to Consumption Smoothing But when that happens, the PIH fails. Irreversibilities create an incentive to shift income to current consumption to increase the likelihood of survival. Borrowing constraints mean that households may face unwanted volatility in consumption. Moreover, the marginal productivity of nutrients may not be equal over time. For example, there is a seasonality in work effort in agriculture. Or certain diseases are more prevalent at certain times of year.

9. Health and Constraints to Consumption Smoothing Behrman et al. (1997) use a panel of Pakistani farm households to estimate calorie response to different income components. The income elasticity of calorie availability depends on the timing and anticipation of income. This means…

10. Health and Constraints to Consumption Smoothing Calorie consumption is lower and less variable in the planting than in the harvest stage. Income earned during the planting period (when food prices and interest rates are high) has a strong effect on calorie consumption. By contrast, harvest period income (when food prices and interests rates are low) has a weaker effect on calorie consumption – people have to eat then.

11. Health and Constraints to Consumption Smoothing These results are important for policy, because they inform us as to when to target policy interventions aimed at improving nutrition. In this case, we would want to target interventions during the planting period. Moreover, they tell us that is important to sufficiently disaggregate the data (i.e., not look at annual data but at seasonal data instead.)

12. Health and Constraints to Consumption Smoothing Calorie intake is thus sensitive to resource availability in both cross-sectional and time series data. Farm profits are increasing in planting period calorie consumption and yet calorie consumption sharply increases at harvest suggest that Pakistani farmers have difficulty transferring resources across production stages to smooth consumption.

13. Miguel and Kremer (2004) “Worms: Identifying Impacts on Education and Health in the Presence of Treatment Externalities,” Econometrica. This is perhaps the one paper that has set into motion the wave of randomized controlled trials. In it, Miguel and Kremer study intestinal helminths, which infect 1.4 billion people worldwide and are especially prevalent among school-aged children.

14. Miguel and Kremer (2004) The problem is that those intestinal worms prevent children from attending school, but that a low-cost, single-dose drug can kill them. Another problem is that those worms are contagious due to hand-to-mouth transmission. They are also water-borne. Moreover, school-aged children have poorer hygiene than their parents, and they are in close contact with one another.

15. Miguel and Kremer (2004) So Miguel and Kremer headed to Busia, Kenya, a region that is now probably the most studied region of the world as far as development policy research goes. Back then, there were 30,000 pupils across 75 schools, and 92 percent of pupils in a random sample were infected with at least one helminth.

16. Miguel and Kremer (2004) Miguel and Kremer adopted the following methodology: • Schools were randomly allocated to treatment and control groups • There were three rounds of treatment • Some students were treated within each school, some were not • Dependent variables: Individual health and education outcomes

17. Miguel and Kremer (2004) The results were stunning: • The proportion of students with heavy and moderate infection goes down by 25% in treatment group. • Cross-school effects: The schools close to a treated school also see a 23% drop in infection rates. • In treatment schools, there was a 25% reduction in absenteeism. • And as a result of treatment, students in treated schools experienced a 0.11 standard deviation improvement in test scores. Given the public good effects, this warrants a subsidy. Why?

18. HIV/AIDS Ainsworth and Over (1997): Governments have a responsibility to prevent HIV infection. The best way to achieve that goal is to target the people who are at most risk of getting AIDS and at most risk of transmitting it: people who have a lot of sexual contacts; users of intravenous drugs; and men who have sex with men. This varies by country, however (e.g., businessmen in China.)

19. HIV/AIDS The main message, however, was ignored by the global health policy community. In 1997, 22 million people were living with AIDS. Now, that number has climbed to 33 million. This represents a 50 percent increase, despite billions of dollars spent on the problem.

20. HIV/AIDS Another big change has been the availability of treatment. The cost fell from over $10,000 per patient-year to less than $1,000 per patient-year. Treatment is also considerably more widespread today than it was at the end of the 20th century. Infected people went from “dying from AIDS to living with HIV.”

21. HIV/AIDS Over talks of the “AIDS transition”: Similar to the demographic transition. Back in the 1970s, people were worried about Ehrlich’s so-called “population bomb” (a rehash of Malthus’ argument). But the contrary has happened – fertility has decreased considerably, and in some countries, population is shrinking.

22. HIV/AIDS Likewise for AIDS: The number of AIDS deaths has been brought down, but the problem now is that the number of new infections has not fallen enough. As a result, there’s been an uptick in the number of people living with AIDS but who need treatment in order to stay alive: for every two people put on treatment, five people become infected.

23. HIV/AIDS And so the need for treatment – and the resulting fiscal burden – continues to grow. Donors have been working on both treatment and prevention. A lot of effort has been made for treatment. On the prevention side, there are only goals for how much money is going to be spent, and not on what prevention means, or how success is measured. But both treatment and prevention must be linked.

24. HIV/AIDS One major problem lies in the measurement of the Sherlock Holmes’ “dogs that don’t bark,” i.e., cases of would-be infections that are ultimately averted by prevention. Two approaches: • Large, repeat surveys of individuals with blood testing. Combine information with prevalence of treatment to assess treatment effectiveness. • New method: test for recent infection, which allows determining how long someone’s been infected. This allows (ac)counting (for) the dogs that didn’t bark by knowing who’s a new case and who’s not.

25. HIV/AIDS Over suggests setting up the proper incentives for recipient countries by picking up on Nancy Birdsall’s idea of “cash on delivery” (COD) aid. That is, a recipient government gets a specific amount of money for every dog that didn’t bark, i.e., for every averted HIV infection. Why is this a global public good?

26. HIV/AIDS There is a view that the HIV/AIDS epidemic is a humanitarian crisis, and that we should not apply the tools of economics to respond to it. Over: If we lived in a world of boundless resources, that would be true. But we don’t, and economics is the study of choice in the face of scarcity. This is especially true in this era of budget austerity. It is thus not ethical to ignore the economics of the HIV/AIDS crisis.

27. Health: Behavior and Systems (The remainder of this chapter is adapted from Duflo, Esther (2010), Luttercontre la pauvreté I – Le développement humain, Paris: Seuil.) Because the poor die at a relatively higher rate, one cannot tackle poverty without improving health. Moreover, health shocks can cause an irreversible descent into poverty (see my colleague Anirudh Krishna’s 2010 book One Illness Away.)

28. Health: Behavior and Systems On the one hand, part of the solution lies in medical research. For example, vaccines against HIV/AIDS, malaria, etc. would greatly improve the lives of the poor in developing countries. On the other hand, human behavior, lack of information, prejudice, and cultural mores play an important role.

29. Health Care: Supply and Demand There is a vicious cycle between the supply and demand of health in many developing countries. The mediocrity of existing health systems and a strong reliance on witch doctors means the low supply of quality health care tends to depress the demand for it. Likewise, the low demand for quality health care tends to depress the supply of it.

30. Health Care: Supply and Demand To break the vicious cycle, policy interventions can aim to significantly improve the supply of quality health care. This can be as simple as creating incentives for nurses to show up for work, which turns out to be a considerable problem in India.

31. Health Care: Supply and Demand Banerjee et al. (2008a) randomly assigned clinics to a control (C) and a treatment (T) group. The treatment consisted in random monthly checks to see if nurses showed up for work. For the first six months, T group nurses showed up for work at a significantly higher rate, but only on Mondays. After a few months, the effect had disappeared and eventually, nurses in the C group ended up showing for work more.

32. Health Care: Supply and Demand Banerjee et al. explain this surprising finding by the fact that punching card machines were vandalized at a considerably higher rate in T group clinics. As a consequence, in T group clinics, there was no longer an incentive to show up at all. Contrast this with a similar study on teacher absenteeism in the same region of India, which led to marked, sustain improvements.

33. Health Care: Supply and Demand In the nurse study, however, the demand for health care did not increase even after the (short-term) improvement in supply. Duflo speculates that this occurs because consumer demand does not increase if consumers are not convinced that the change is durable or because the demand for public health care is simply low (private clinics prescribe a lot of antibiotics; public clinics mostly do prevention).

34. Health Care: Supply and Demand To test these hypotheses, Banerjee et al. (2008b) introduced a credible, marked improvement in the supply of public preventive health care, working with a known and trusted NGO. To do so, they offered to vaccinate children in randomly selected villages. The rate of vaccination increased from 6 to 17%. So even with considerably reduced transaction costs, the demand for preventive health care remains low.

35. Health Care: Supply and Demand Duflo speculates that people are highly sensitive to prices, both positive and negative (i.e., subsidies) for preventive health interventions. For really small price increases (i.e., less than $1), there are sharp drops in adoption of deworming drugs (Kremer and Miguel, 2007); insecticide-treated nets (ITNs, Cohen and Dupas, 2009); and Clorin (Ashraf et al., 2007). Similar effects for subsidies.

36. Health Care: Supply and Demand Moreover, note that no matter what individuals and households pay for preventive health care, usage rates (not the same as uptake) are roughly similar. For example, Hoffmann et al. (2009) find that usage rates of ITNs are roughly the same whether ITNs are purchased or received for free.