ECONOMIC GROWTH, PUBLIC EXPENDITURE AND HUMAN DEVELOPMENT IN ASIA

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1 PROSIDING PERKEM IV, JILID 1 (2009) ISSN : X ECONOMIC GROWTH, PUBLIC EXPENDITURE AND HUMAN DEVELOPMENT IN ASIA FARIASTUTI DJAFAR ABSTRACT This paper has two main objectives. The first objective is to analyze typology of the relationship between Economic Growth (EG) and Life Expectancy at Birth (LE), Public Expenditure (PE) on health and LE, and EG and PE in Asia. The second objective is to compare these three typologies of EG-LE, PE-LE and EG-PE relationships. Analysis on this paper was mainly based on cross-sectional data derived from the 2006 World Development Report and the 2007/2008 Human Development Report. Total number of observations was 31 countries in Asia. The Cartesian diagram was employed to obtain the typology of the relationship between variables under study. This study found four groups in the typologies of EG-LE and PE-LE relationships: vicious (low EG/PE-low LE); virtuous (high EG/PE-high LE), LE-lopsided (high LE-low EG/PE), and different quadrants groups. Malaysia together with countries such as Kuwait and Singapore were in LE-lopsided quadrant group meaning that these countries have been successful in their human development. This study also found that quality of economic growth and effective use of public expenditure are important in influencing human development. Countries may have high human development though they have low economic growth rates and low public expenditure on health. In contrast, there are also countries having high economic growth and high public expenditure on health but they have low human development. Most importantly, some countries in Asia are in human development traps because they have low economic growth, low public expenditure on health and low human development. The absence of appropriate policies will force these countries to stay long in human development traps and subsequently it will deteriorate quality of human development in the future. Keywords: economic growth; human development; public expenditure. 1. Introduction Human development as the ultimate objective of development had been raised a long time ago by a well known philosopher, Aristotle, as well as economists such as William Petty, Gregory King, Franscois Quesnay, Antoine Lavoisier and Joseph Lagrange, Adam Smith, David Ricardo, Robert Malthus, Karl Marx and John Stuart Mill (United Nations Development Plan/UNDP 1990). However, practical measurement of Gross National Product (GNP) and the increase in materialistic values in the society had neglected the human orientation in development for years. The overlook of human development has provided lessons to many countries. The countries could have a high economic growth but at the same time they experienced deprivation of the socioeconomic condition of the population due to the trickledown effect which did not work well. The countries were also not able to protect their citizens against the rapid spread of problems in drugs, alcoholism, AIDS, homelessness, violence and the breakdown of family relations (UNDP 1990). The important of human development had been reemphasized by UNDP on its first Human Development Report in 1990 as: People are the real wealth of a nation. The basic objective of development is to create an enabling environment for people to enjoy long, healthy, and creative lives. This may appear to be a simple truth. But it is often forgotten in Persidangan Kebangsaan Ekonomi Malaysia (PERKEM IV) Memacu Pembangunan Ekonomi Dalam Ketidaktentuan Persekitaran Global Kuantan, Pahang, 2-4 Jun 2009

2 78 Fariastuti Djafar the immediate concern with the accumulation of commodities and financial wealth (UNDP 1990). Human development is defined as enlarging people's choices and the level of their achieved wellbeing (UNDP 1990). The human development is measured by three essentials factors, longevity, knowledge and decent living standard which are measured by Life Expectancy at Birth, education and per capita income respectively (UNDP 1990). The concept of human development has been extended by Sen (1996). He emphasizes on development as a way to expand human capability which is ability and potentials to do and to be. Development is the freedom to achieve valuable doings and beings (functioning). Functioning are ends as well as means of human life. Sen (1996) regards that development as freedom and capability to function, that is what we can do with what we have. There are three core values of development which are sustenance-the ability to keep individual alive-, self-esteem and freedom from servitude and poverty. This paper has two main objectives. The first objective is to analyze typology of the relationship between Economic Growth (EG) and Life Expectancy at Birth (LE), Public Expenditure (PE) on health and LE, and EG and PE in Asia. This is followed by comparing these three typologies of EG-LE, PE-LE and EG-PE relationships in the second objective. 2. Data and Method of Analysis Analysis on this paper was mainly based on cross-sectional data derived from the 2006 World Development Report and the 2007/2008 Human Development Report. Two variables which are Gross Domestic Product (GDP) growth representing economic growth and LE representing human development particularly health are available on the 2006 World Development Report. The other variable which is Public Expenditure on health measured by a percentage of GDP is available on the 2007/2008 Human Development Report. Only 31 countries in Asia have GDP growth and LE variables on the 2006 World Development Report. Typology of LE-EG, LE-PE and EG-PE relationships was derived by applying the Cartesian Diagram. Each diagram was divided into four quadrants which were quadrants 1, 2, 3 and 4. The titles for each diagram and each quadrant can be seen in Table 1. For example, the title for Diagram 1 is the typology of LE and EG relationship. Diagram 1 consists of a vicious quadrant for low EG and low LE, an EG lopsided quadrant for high EG and low LE, a virtuous quadrant for high EG and high LE, and a LE lopsided quadrant for high LE and low EG. Data for each country would be compared to the average of total observations (31 countries). The terms high and low in the analysis were relative measurement and only applicable for each diagram. Titles of quadrant/ diagram Quadrant 1 (Vicious) Table 1: The Cartesian diagram by quadrants Quadrant 2 (Lopsided) Diagram 1 (LE and EG) low EG, low LE EG lopsided (high EG, low LE) Diagram 2 (LE and PE) low PE, low LE PE lopsided (high PE, low LE) Quadrant 3 (Virtuous) high EG, high LE high PE, high LE Quadrant 4 (Lopsided) LE lopsided (high LE, low EG) LE lopsided (high LE, low, low PE) Diagram 3 (EG and PE) low EG, low PE EG lopsided (high EG, low PE) high EG, high PE PE lopsided (high PE, low EG) Notes: EG= Economic Growth; LE= Life Expectancy at Birth, PE=Public Expenditure on Health.

3 Economic Growth, Public Expenditure and Human Development Typology of EG-LE Relationship A study by Ranis & Stewart (2005) has proved two ways linkage between EG and Human Development (HD) and this linkage is not automatic. First linkage occurs when EG affects HD. EG provides the resources to permit sustained improvements in HD through allocation of household income, government allocation of public spending and activities of civil society. Second linkage occurs when HD affects EG through improvement in labor quality and investment. Ranis & Stewart (2005) also shows dynamic relationships between EG and HD. One country may move from one quadrant to another quadrant which can be better or worse than the previous quadrant or stay long in a particular quadrant. Ranis & Stewart (2005) argue that sustainable economic growth is required for sustainable human development and vice versa. In order to sustain high economic performance, economic growth should be accompanied by high quality of growth. Jahan (2008) stated that the high quality of economic growth requires job creation, poverty reduction, participation, culturally enshrined and environment-friendly. Otherwise, economic growth tends to be jobless, ruthless, voiceless, rootless and futureless which is not conducive for sustainable human development. The important role of quality of economic growth on health can be shown by the case of 11 countries in LE-lopsided quadrant (Table 2 and Figure 1). These countries had low EG but they had high LE. This is not surprising since many of these countries, such as Japan, Kuwait, Malaysia and Singapore have well established economy. These countries have relatively low rate and high quality of economic growth indicated by high per capita income. Seven out of 11 countries in LE-lopsided quadrant had over USD 4,000 per capita income which enabled them to provide a good quality of health services to their people. The quality of economic growth rates in Sri Lanka, the Philippines, and Thailand were not as well as the other countries in LE-lopsided quadrant because their higher economic growth rates and lower per capita income (less than USD 3,000) compared to the other countries. Having current quality of economic growth had enabled these three countries to have high LE. However, the high LE in these countries will not be sustainable if this high LE is not able to improve quality of economic growth. The high economic growth is not always accompanied by the high quality of growth. The high economic growth which is in low quality may cause poor health for the society. The case of five countries (India, Russian Federation, Tajikistan, Kazakhstan and Turkmenistan) in EGlopsided quadrant (high EG and low LE) confirmed this statement. The high economic growth rate in these countries should be more able to improve health of their societies. Not all countries have necessary condition to improve health of their societies. As many as 10 countries were in the vicious quadrant in Table 2 and Diagram 1 because they had low EG as well as low LE. These countries were in human development traps. Their low EG was not able to improve their low LE while their low LE was not able to contribute to the high EG due to low labor productivity. Some countries seem to be in an ideal condition by having high EG and high LE (virtuous quadrant). Five countries (Iran, Vietnam, Georgia, China and Armenia) were in this quadrant. The high economic growth usually occurs only for the short run meaning that these countries will be more likely to move from the virtuous quadrant to another quadrant in the near future. As long as the high economic growth rate is in high quality, these countries will be able to move to LE-lopsided quadrant. Otherwise they will move to either in vicious or EG lopsided quadrants.

4 80 Fariastuti Djafar Table 2: Typology of the relationship between Life Expectancy at Birth and GDP growth, selected Asian countries, LE lopsided quadrant Annual growth of GDP (%) ( ) Life expectancy at birth (years) (2003) Virtuous quadrant Annual growth of GDP (%) ( ) Life expectancy at birth (years) (2003) Japan Iran Kuwait Vietnam Singapore Georgia Syrian Arab Repub China Saudi Arabia Armenia Oman Sri Lanka Philippines Malaysia Korea Thailand Subtotal= 11 ( 35 %) Subtotal= 5 (16 %) Vicious quadrant EG lopsided quadrant Nepal India Pakistan Russian Federation Kyrgyzstan Tajikistan Indonesia Kazakhstan Uzbekistan Turkmenistan Bangladesh Mongolia Turkey Lao PDR Cambodia Subtotal=10 ( 32 %) Subtotal= 5 ( 16 %) Total cases= 31 Source: World Development Report 2006(Tables 1 and 3) Note: Mean of GDP growth= 5.73 %; Mean of life expectancy at birth= years

5 Economic Growth, Public Expenditure and Human Development 81 Figure 1: Typology of the relationship between Life Expectancy at Birth and GDP growth 4. Typology of PE-LE Relationship One of the factors which link EG with LE is public expenditure (Ranis & Stewart 2005). Qureshi (2009) on his study in Pakistan found that public expenditure on human development would improve indicators of human development as well as economic growth. In contrast, higher public expenditure on economic growth might neither result into better human development indicators nor economic indicators. The important of expenditure on human development is not only found at the macro/national level but also at the micro/household level. Low household expenditure on human development due to poverty will affect low income of the future generation. This human development trap was found in Mexico by Mayer-Foulkes (2003). The effects found early child development on the acquisition of education, and therefore on adult income which are substantially affected by nutrition and health. The role of public expenditure on health is very important in improving health condition of the society. However, people in poor countries cannot rely heavily on public expenditure. Since health is related to survival, households are more willing to spend money for health than for education. In Indonesia, private/household spends for health was around 80 per cent of the total health expenditure, while the government was only responsible for 20 per cent (Central Bureau of Statistics and National Planning Board 2004). Countries having high percentage of PE on health may have high LE. There were six countries in virtuous quadrant (high PE and high LE) (Table 3 and Figure 2) implying the high commitment of these countries towards health. Some of these countries are rich countries with per capita income of more than USD 10,000 such as Korea and Japan. However, high PE on health does not guarantee the optimum of health improvement if it is not accompanied by the right priority as well as effective use of PE. This condition was confirmed by seven countries in PE-lopsided quadrant (high PE and low LE). Since all of these countries, except Turkey, are formerly under USSR, another possible explanation is that these new countries may at the early stage of human development while health cannot be improved rapidly in the short run.

6 82 Fariastuti Djafar Table 3: Typology of the relationship between Life Expectancy at Birth and Public Expenditure on health, selected Asian countries, LE lopsided quadrant Public Expenditure on Health (% of GDP) (2004) a Life expectancy at Virtuous birth (years) (2003) b quadrant Public Expenditure on Health (% of GDP) (2004) a Life expectancy at birth (years) (2003) b China Iran Armenia Japan Georgia Korea Philippines Oman Singapore Saudi Arabia Sri Lanka 2 74 Thailand Vietnam Kuwait Malaysia Syrian Arab Republic Subtotal= 10 ( 32 %) Subtotal= 6 (19 %) EG lopsided Vicious quadrant quadrant Nepal Kazakhstan Pakistan Kyrgyzstan Cambodia Mongolia Russian Indonesia Federation India Turkey Bangladesh Turkmenistan Lao PDR Uzbekistan Tajikistan 1 66 Subtotal=8 (26 %) Subtotal= 7 (23 %) Total cases= 31 Source: a. 2007/2008 Human Development Report b. World Development Report 2006(Tables 1 and 3) Note: Mean of Public Expenditure (% of GDP) = 2.22 %; Mean of life expectancy at birth= years Human development traps is also found in the typology of PE-LE relationship. As many as eight countries in Asia were in vicious quadrant (low PE and low LE). These countries were mostly poor countries with per capita income of less than USD 1,000. They may have many problems in health improvement such as limited budget, lack of budget priority and ineffective use of PE on health. These problems lead to low human development while low human development has not been able to contribute to sustainable economic growth. An effective use of PE appears to be more important factor in improving health than PE itself. Regardless amount of health budget, effective use of PE on health will accelerate health improvement. This study found that ten countries were in LE-lopsided quadrant (high LE and low PE). Some of these countries such as Malaysia, Kuwait and Singapore had high per capita income. Their low PE on health does not necessarily mean limited budget for health since absolute value of the health budget and effective use of the budget in these countries may have been high.

7 Economic Growth, Public Expenditure and Human Development 83 Figure 2: Typology of the relationship between Life Expectancy at Birth and Public Expenditure on health 5. Typology of EG-PE Relationship Economic growth may affect allocation of PE on health. The high EG will enable countries to allocate more funds for health. Iran, Russian Federation, Turkmenistan and Kazakhstan were the four countries which had high EG as well as high PE on health (Table 4 and Figure 3). However, not all countries having high EG have high PE on health. Five countries were in EG-lopsided quadrant (high EG and low PE). These countries may have not put health on their first priority in their PE. Table 4: Typology of the relationship between GDP growth and Public Expenditure on health, selected Asian countries, PE lopsided quadrant Annual growth of GDP (%) ( ) a Public Expenditure (% of GDP) 2004 b Virtuous quadrant Annual growth of GDP (%) ( ) a Public Expenditure (% of GDP) 2004 b Turkey Iran Kuwait Russian Federation Saudi Arabia Turkmenistan Oman Kazakhstan Korea Japan Mongolia Uzbekistan Kyrgyzstan Malaysia Thailand Syrian Arab Repub Subtotal= 12 (39 %) Subtotal= 4 (13 %)

8 84 Fariastuti Djafar EG lopsided Vicious quadrant quadrant Nepal Vietnam Pakistan China Lao PDR Armenia Singapore Georgia Sri Lanka Tajikistan Indonesia Bangladesh Cambodia India Philippines Subtotal= 10 (32 %) Subtotal= 5 (16 %) Total cases= 31 Source: a. World Development Report 2006(Tables 1 and 3) b. 2007/2008 Human Development Report Note: Mean of GDP growth= 5.73 %; Mean of Public Expenditure (% of GDP) =2.22 % Figure 3: Typology of the relationship between GDP growth and Public Expenditure on health Low EG can be an obstacle to countries to have high PE on health. As many as 10 countries including Singapore were in vicious quadrant (low EG and low PE). Singapore is different from the other countries in the same quadrant. Low EG in Singapore is more likely to reflect its developed economy while low PE on health is more likely to reflect a large amount of GNP of Singapore. Commitment of many countries in Asia on health has been relatively good. There were 12 countries in Asia in PE-lopsided quadrant (high PE and low EG). This is mainly due to many rich countries in this quadrant. High PE on health in order to provide excellent health services has been regarded as an obligation of the countries to the societies. High PE on health will improve health of the people and subsequently it will increase and sustain EG and PE on health.

9 Economic Growth, Public Expenditure and Human Development Typology of EG-LE, PE-LE and EG-LE Relationships: A Comparison Based on observation over 31 countries, typology of EG-LE and PE-LE relationships can be classified into four groups. First group consists of six countries in vicious quadrant (low EG/PE-low LE), followed by the only one country (Iran) in the second group in virtuous quadrant (high EG/PE-high LE). The third group covers six countries in LE-lopsided quadrant (high LE-low EG/PE). The last group consists of 18 countries having different quadrants in both of EG-LE and PE-LE relationships respectively (Table 5). It is interesting to note that all countries, either in vicious or virtuous quadrant for both of EG-LE and PE-LE relationships, are also in the same quadrant in EG-PE relationship. The countries having low EG, low PE and low LE confirm that they are in human development traps. All of these countries have per capita income of USD 600 or less, except Indonesia which has much higher per capita income (USD 1,140). The high per capita income in Indonesia should enable this country to exit from human development traps faster than the other countries. All countries in vicious quadrant have to create policies which can help them to exit from this quadrant. Otherwise, these countries will stay long in this quadrant which will deteriorate their future human capital. As the only country in virtuous quadrant (high EG, high PE and high LE) for all typologies of EG-LE, PE-LE and EG-PE relationships, Iran s sustainability in this quadrant is still questionable since high EG usually occurs in short run. As long as high EG accompanied by high quality of growth and high PE on health accompanied by effective use of PE, Iran can move to LE-lopsided quadrant instead of EG-lopsided quadrant. Countries in LE-lopsided quadrant are very potential to be much more developed in the future. Taken EG-PE relationship into account, these countries are classified into two subgroups. First sub-group consists of three countries (Kuwait, Malaysia and Syrian Arab Republic) in PE-lopsided quadrant (high EG and high PE). These countries have had good human development which should be able translated into sustainable economic growth and human development. All of these three countries also have good commitment on health because they have high PE on health though they have low EG. Second sub-group also consists of three countries (the Philippines, Singapore and Sri Lanka) in vicious quadrant. Except Singapore, the Philippines and Sri Lanka may have more problems than the first sub-group. The Philippines and Sri Lanka currently have high LE due to relatively high quality of EG and effective use of PE. However, their low EG and low PE can be an obstacle for these countries to have sustainable economic growth and human development. A group of countries having different quadrants in both of EG-LE and PE-LE relationships can be classified into five sub-groups (Table 5). These five sub-groups are as follows: vicious-pe lopsided (4 countries), EG lopsided-vicious (2 countries), virtuous-le lopsided (4 countries), LE lopsided-virtuous (5 countries), and EG lopsided-pe lopsided (3 countries). Countries either in LE lopsided or EG lopsided are relatively more easily to have sustainable economic growth and human development since they have had necessary condition required by this sustainability. High human capital should be well managed enabling them to contribute to high quality of economic growth. Furthermore, economic growth should be in high quality ensuring good human capital to be functioning in positive way of life.

10 86 Fariastuti Djafar Table 5: Typology of the relationship between Gross Domestic Product (GDP) growth, Life Expectancy at Birth and Public Expenditure, and per capita income, selected Asian countries, Countries GDP Growth and Life Expectancy at birth a Typology Public Expenditure and Life Expectancy at birth a GDP Growth and Public Expenditure a Per capita Income (USD) 2004 b Bangladesh Vicious Vicious Vicious 440 Cambodia Vicious Vicious Vicious 320 Indonesia Vicious Vicious Vicious 1,140 Nepal Vicious Vicious Vicious 260 Pakistan Vicious Vicious Vicious 600 Lao PDR Vicious Vicious Vicious 390 Kyrgyzstan Vicious PE Lopsided PE Lopsided 400 Mongolia Vicious PE Lopsided PE Lopsided 590 Turkey Vicious PE Lopsided PE Lopsided 3,750 Uzbekistan Vicious PE Lopsided PE Lopsided 460 Tajikistan EG lopsided Vicious EG Lopsided 280 India EG Lopsided Vicious Vicious 620 Iran Virtuous Virtuous Virtuous 2,300 China Virtuous LE Lopsided EG Lopsided 1,290 Georgia Virtuous LE Lopsided EG Lopsided 1,040 Armenia Virtuous LE Lopsided EG Lopsided 1,120 Vietnam Virtuous LE Lopsided EG Lopsided 650 Japan LE lopsided Virtuous PE Lopsided 37,180 Oman LE Lopsided Virtuous PE Lopsided 7,890 Korea LE Lopsided Virtuous PE Lopsided 13,980 Saudi Arabia LE Lopsided Virtuous PE Lopsided 10,430 Thailand LE Lopsided Virtuous PE Lopsided 2,540 Kuwait LE lopsided LE lopsided PE Lopsided 17,970 Malaysia LE Lopsided LE Lopsided PE Lopsided 4,650 Syrian Arab PE Lopsided 1,190 LE Lopsided LE Lopsided Repub. Philippines LE Lopsided LE Lopsided Vicious 1,170 Singapore LE Lopsided LE Lopsided Vicious 24,220 Sri Lanka LE Lopsided LE Lopsided Vicious 1,010 Russian Virtuous 3,418 EG Lopsided PE Lopsided Federation Kazakhstan EG Lopsided PE Lopsided Virtuous 2,260 Turkmenistan EG lopsided PE Lopsided Virtuous 1,340 Total Source: a Tables 2, 3 and 4 b World Development Report 2006

11 Economic Growth, Public Expenditure and Human Development Conclusion This study found four groups in the typology of EG-LE and PE-LE relationships. These are vicious (low EG/PE-low LE), virtuous (high EG/PE-high LE), LE-lopsided (high LE-low EG/PE), and different quadrants groups. A group having different quadrants in EG-LE and PE-LE relationships has 5 sub-groups which are vicious-pe lopsided, EG lopsided-vicious, virtuous-le lopsided, LE lopsided-virtuous, and EG lopsided-pe lopsided. Based on the typology of EG-LE, PE-LE and EG-PE relationships, it can be concluded that the effect of economic growth and public expenditure on human development is not automatic. Quality of economic growth and effective use of public expenditure become very important factors in human development improvement. Low economic growth rate and low public expenditure may create high human development as long as they are accompanied by high quality of economic growth and effective use of public expenditure respectively. In contrast, countries having high economic growth and high public expenditure on health may have low human development. As many as six countries in Asia are in human development traps. These countries have low economic growth rates, low public expenditure on health and low human development. These countries are more difficult to exit from human development traps because they also have low quality of economic growth indicated by their low per capita income. Countries having high human development and high commitment on human development measured by high public expenditure on health are very fortunate countries in term of human development in Asia. These countries including Malaysia have necessary condition to create sustainable human development and economic growth. Since sustainability does not occur automatically, these countries should ensure that their high human capital will contribute to high quality and sustainable economic growth. Last but not least, it should be bear in mind that human being is the end target of development. People can be more healthy but this does not guarantee that they will do good things for their families and countries. Therefore, the role of government is very important in ensuring every policy regarding human development and economic development are on the high quality and on the right track. Acknowledgement Thank you to Universiti Malaysia Sarawak (UNIMAS) for providing me funding to present this paper on seminar Memacu Pembangunan Ekonomi dalam Ketidaktentuan Persekitaran Global. Thank you also to Faculty of Economics and Business, UNIMAS, for facilitating me in doing this research. References Central Bureau of Statistics and National Planning Board Human Development as a Civic Right (Chapter 3) in Indonesia Human Development Report Jakarta. Jahan, S Inclusive Growth: Notions and Policy Implications. Policy Dialogue Series NO. 33. New York: Bureau of Development Policy, UNDP. Mayer-Foulkes Human Development Traps and Economic Growth. Mexico: Centro de Investigacion y Docencia Economicas, Ranis, G., & F. Stewart Dynamic Links between the Economy and Human Development. DESA (Department of Economic and Social Affairs) Working Paper No. 8. New York: United Nations. Qureshi,M.A Human Development, Public Expenditure and Economic Growth: A System Dynamics Approach, International Journal of Social Economics. 36 (Nos ½): Sen, Amartya On the foundation of Welfare Economics: Utility, Capability and Practical Reason, in Fariina

12 88 Fariastuti Djafar Hahn and Vannucci (eds) Ethics, Rationality and Economic Behaviour. Oxford: Clarendon Press. United Nations Development Program (UNDP) Defining and Measuring Human Development (Chapter 1) in Human Development Report New York: Oxford University Press. World Bank World Development Report New York: The World Bank and Oxford University Press.