Kelvin Teo
Amartya Sen, winner of the 1998 Nobel Prize in Economics for his work on welfare economics
A rhetorical question that we may ask ourselves during one of those reflective moments is what constitutes national progress or development? Those who subscribe to the traditional mould of development economics may look to national product, aggregate income measures or total supply of particular goods. Conventionally, economic development is reflected via indicators such as unemployment rate, Consumer price indices (which reflect inflation), Gross Domestic Product, Gross National Income..the list goes on.
In contrast, Amartya Sen, who received the 1998 Nobel Prize in Economic Sciences for his work in welfare economics took a different approach – a philosophical one. Sen’s philosophical leanings was to define his scholarship in economics, which involves melding concepts of both fields (philosophy and economics). In his 1983 paper published in The Economic Journal entitled “Development: Which Way Now?“, Sen argued the limitations of traditional development economics and offered an alternative perspective of economic development – that of entitlement and the capabilities generated from such entitlements. Sen saw economic development in terms of what the people can and cannot do such as leading long, healthy lives, being able to read, write and communicate, take part in literary and scientific pursuits and so on.
There are broadly speaking two forms of entitlement – the first one is derived from purchasing power. For example, one derives a monthly income of $3000 through provision of labour, sale of his product or services. The income can be used to acquire some capabilities such as nutritional nourishment or an advanced education. The capabilities one may acquire is limited by his income, and purchasing power which can be affected by inflation. The other form of entitlement that is in common place within a socialist economy is the entitlements that one may get from the state. Examples of such can be state-funded/provided healthcare, education. In the same paper, Sen also pointed out that income has its limitations on analysing one’s entitlements if we factor in physical access issues to goods and services one is entitled to. Thus, even with a high purchasing power, if there are no colleges, hospitals and clinics, one may not be able to access education and healthcare services.
In support of his entitlement thesis, Sen cited the case study of the Bangladesh famine of 1974, which he described as an anomaly given that it came at a time when food supply was at its peak ironically in terms of food availability per head. Though the floods damaged agriculture, it only did its damage by reduction of food output very much later. What happened during the immediate aftermath of the floods was that workers from the agricultural industry lost their jobs. This was compounded by an inflation within the economy which reduced the purchasing power of the rural labourers who lacked the means to raise their wages correspondingly. Sen described this anomalous situation as a “failure of entitlement systems operating through ownership and exchange.
The entitlements that we speak of relate to the field of welfare economics, especially so when the state has a hand in the provisions of entitlements. Consider this scenario within a state that practises a socialist healthcare system – the latter has to make a choice between subsidising two types of drugs – one cholesterol lowering and the other, an anti-cancer drug – albeit with limited funds that it has to decide between the two. In such an instance, a distributive efficiency known as the Pareto efficiency will be of interest to the policy maker. What the Pareto efficiency shows is the amount of utility people can get from a change in the distribution of goods or services. A change to a different allocation which makes one individual better off without making another one worse off is known as Pareto improvement. The point at which Pareto improvements can no longer be made is known as Pareto optimal.
In deciding between which drug to subsidise, the preference of one drug over another will make one group of patients better off, whilst not making the other group better off. The decision will of course depend first and foremost on epidemiological studies, especially the population statistics indicating number of patients with heart disease (caused by high cholesterol) and patients with cancer, including diseases that patients are most likely to die from. In a hypothetical population of lean individuals with low cholesterol but high incidence of cancer, it will make more sense to subsidise the anti-cancer drug. However, the world is much more complex with social, cultural and environmental factors in an interaction with human health, resulting in differences in the way diseases manifest themselves. Thus, welfare economists turn to another measure known as the cost-benefit analysis.
With regards specifically to deciding which drug to subsidise, the cost benefit analysis may involve the calculation of Quality adjusted life years (QALY) that is derived from the sum of the quality of life experienced by patients and quantity of life lived as a result of the drug treatment. The QALY to the costs of treatment ratio is then calculated. This calculation is adopted in the cost-benefit analysis within the decision-making framework of evaluating whether a drug should be subsidised in the Australia’s Pharmaceutical Benefits Scheme (PBS). The Australian PBS actually goes a step further by evaluating the socio-economic impact of drug treatment especially on productivity.
The socio-economic impact of health on the economy is significant and cannot be ignored. Health improvements can boost the pace of income growth through participation in the labour market, worker productivity and other factors. Two economists from Harvard University School of Population and International Health, David Bloom and David Canning estimated the macroeconomic impact of health on production, as reflected by GDP, using data from various countries from 1960 to 1995. A previous investigator, David Weil, an economist from Brown University performed a calibration study between health as indicated by adults survival rates and productivity. He found that a one percentage point increase in adult survival rates translated into a 1.68% increase in labour productivity. Bloom and Canning performed a similar estimation of adult survival rates and its impact on labour productivity and found that a one percentage point in adult survival rate resulted in a 2.8% increase in labour productivity with a 95% confidence interval ranging from 1.2% to 4.3%, with Weil’s finding well within the range.
There are those who subscribe to the belief that the state should not intervene in healthcare of the citizens, advocating the concept of a fully privatised healthcare system. There are merits in that position; if one does not wish to be burdened with a huge medical bill for a heart transplant, then he pay attention to his health health by being up-to-date with his yearly check-ups and watching his lifestyle. However, there are those left behind in the fringe who may not be able to afford their healthcare. Malcolm Gladwell, in a New Yorker article entitled “The Moral Hazard Myth” narrated the plight of a couple who are uninsured and unable to afford their dental care – Gina, a hairdresser, has a peculiar habit when she speaks, closing her mouth due to a rotting front tooth, and her husband, Daniel, a construction worker, pulled out his bad teeth with pliers.
There are two arguements against advocating a non-interventionist approach – one, where personal health becomes a national issue, and two, from the basis of entitlement as reasoned by Sen. For the first arguement, the cases of Gina and Daniel are not much of a public health nightmare since their dental disease only affect them personally, but how about the impact of transmissible infectious diseases? Suppose a poor and destitute patient contracts a medically serious form of flu virus that is airborne, but cannot afford a night’s stay in a hospital. Is it then in the community’s best interest that this patient should walk out there in the open? A straight NO. It is then in the public’s interest that he should be treated and quarantined in the hospital regardless of his affordability, and this is an area that the state will intervene, lest a pandemic of epic proportions may result and cripple the entire economy. In fact, major healthcare systems have a notification practice in place whenever a patient is diagnosed with a listed infectious disease.
For the second arguement, even if we assume that everyone has the purchasing power, asymmetry in distribution of goods and services in which one is entitled to will also mean that they miss out on their entitlement. In this case, entitlement is affected by physical access. This is also an issue in the real world. Rural communities for instance suffer from a dearth of medical facilities. Privatised healthcare providers are motivated by profits and thus, are unlikely to venture into rural areas where customer base is much lower. Hence, in such cases, the state may have to intervene by establishing a clinic within the rural community.
For a policy maker whose work or interest spans healthcare and national development, the approach will be to address the very basic question of what constitutes national development? In fact, this basic question allows one to elucidate the characteristics of national development, and its goals and prioritise accordingly. There is nothing wrong in subscribing to traditional models of economic development, but it is worthwhile to consider Amartya Sen’s approach to development which centers around entitlements and their generation of capabilities. Healthcare can be seen as one of the entitlements, and as studies indicate, good health lead to positive macroeconomic outlook. Hence, state intervention on healthcare funding will invariably involve cost-benefit analysis on the best approach to take. A last word on entitlement is that it is sometimes not necessarily a reflection of income, but can be plagued by physical access issues too.
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Photo courtesy of the United Nations Development Programme
