Healthcare Spending, Institutional Quality and Economic Growth: A Panel Study of East Asian Countries

Abstract

The study investigates the short- and long-run relationships among health spending, institutional quality, domestic investment, and foreign direct investment and their effects on the economic prosperity of East Asian countries from 2002 to 2020. Using data from 21 East Asian countries, we explore the relationship between healthcare expenditure and institutional frameworks and their impact on economic growth. Pooled ordinary least squares (OLS) and random-effects (RE) models are used. Relationships between the variables are estimated by using the Johansen-Fisher cointegration and Granger causality tests. The results reveal that health expenditure has a positive relationship with economic growth in the East Asian region in the RE model (0.2137, p<0.05), meaning that a 1% increase in health expenditure would lead to an increase in GDP per capita of around 0.21%. Furthermore, the cointegration test result shows the relationship between the variables in the long run. Moreover, there is also a bidirectional relationship between healthcare spending and economic development. Moreover, the quality of institutions can be shown to have unidirectional causality with health expenditure. The most important institutional dimensions that contribute to growth in the region are Regulatory Quality and Control of Corruption, with no statistically significant influence observed for Government Effectiveness and Rule of Law. The results reveal that countries in East Asia have been able to use their institutional arrangements effectively to convert health investments into productive human capital and continue to enjoy economic growth.