Health , Education and Endogenous Growth

The purpose of the paper is to show that, from a growth perspective, government resources can be spent in two different ways. Resources can be allocated to uses which support growth, and to uses which generate growth. We take the provision of health services as an example of the first type of use, and the provision of educational services as an example of the second. This enables us to integrate both types of uses of scarce resources in an endogenous growth framework and to derive the optimum mix of the provision of health and educational services both from the perspective of health as a complement to growth and health as a substitute for growth. The model illustrates that there is a trade-off between growth as such and the provision of health-services. It also shows that a slow down in growth could be expected to occur when the preference for health is positively influenced by a growing income per head or in the case of an ageing population. Finally, we show that the model can account for a 'growth take off' in countries which are too poor to save, and that this take off can be induced by 'just the right' amount of income transfer to those countries : too little aid doesn't seem to help at all, while too much aid unnecessarily burdens the long term solvability of the receiving country if aid is provided in the form of loans.1 Introduction Baumol (1967) stresses the importance of technological differences between the separate sectors of an economy for its growth performance at the aggregate level. More in particular, Baumol divides economic activities into those which do not provide any serious scope for productivity increases (like personal services) and those which do (industrial activities in particular). He concludes that as a result of these productivity asymmetries, the value share of 'low productivity' activities will gain in importance over time, i.e. a growing part of national income will be spent (and earned) through low productivity activities, as long as there is a demand for these activities. This phenomenon has become known as 'Baumols disease'. A typical example of such a low productivity personal service may be the provision of health services. Since health problems are almost always experienced as acute by the sufferer, the demand for health services will not vanish as long as people are subject to (exogenous) variations in their health …