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Is health care a luxury or necessity good? Evidence from Asian countries

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Abstract

This study investigates long run relationship between health care expenditure and real income in fifteen selected Asian countries over the period 1995–2014 using the panel cointegration tests and controlling for cross-sectional dependence through unobserved common correlated factors (UCFs). The results show that health care expenditure and income are cointegrated. It is found that the income elasticity scales down when UCFs are controlled, which implies that ignoring UCFs produces biased and inconsistent estimates. The Mean Group and Common Correlated Effects Mean Group estimates reveal that long run income elasticity of health care is less than unity for the entire panel, indicating that health care is a necessity good in Asian countries. Within the sample, income elasticity for South Asian Association for Regional Cooperation countries and Association of Southeast Asian Nations countries is also less than unity. However, many of the previous studies report income elasticity greater than unity. The difference between the results we found in our study compared to previous work could be attributed to the use of estimation methodology and the sample analyzed. Overall, health care has been found a necessity good in Asian countries in the long run.

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Notes

  1. For example, Newhouse (1977), Murthy and Ukpolo (1994), Hansen and King (1996), Blomqvist and Carter (1997), McCoskey and Selden (1998), Roberts (1999), Gerdtham and Lothgren (2002), Dreger and Reimers (2005), Baltagi and Moscone (2010), Wang (2011), Boungnarasy (2011), Mehrara et al. (2012), Murthy and Okunade (2016), Pattnayk and Chdha (2016) and among others.

  2. For South Asian Association for Regional Cooperation (SAARC) countries only few studies are available on HCE and GDP relationship, which are Hassan et al. (2014), Khan and Mahumud (2015) and Khan et al. (2016).

  3. Countries included in the analysis are: Bangladesh, Bhutan, India, Indonesia, Japan, Malaysia, Maldives, Nepal, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Thailand and Vietnam.

  4. Baltagi and Moscone (2010) and Pattnayk and Chdha (2016) also highlighted this issue.

  5. In this study, we have used health care expenditure and health care spending in a same meaning.

  6. An excellent review of literature can be found in Halici-Tuluce et al. (2016).

  7. For instance, Hansen and King (1996), Newhouse (1977), Gerdtham and Lothgren (2000), Murthy and Okunade (2009), Baltagi and Moscone (2010), Pattnayk and Chdha (2016) and Khan et al. (2016).

  8. Technological progress in health sector generally consists of introduction of innovative entities; medical devices; diagnostic testing methods; new surgical procedures; health monitoring equipments and other processes and procedures (Murthy and Okunade 2016).

  9. French (2012) noted that countries which are economically integrated, shocks to income would be expected to transmit into other country. For instance, oil price shock lowers aggregate output in oil importing countries.

  10. For further detail, see Kapetanios et al. (2011).

  11. A comprehensive review of the second generation tests is available in Breitung and Pesaran (2007) and Choi (2006).

  12. IPS stands for Im et al. (2003).

  13. One limitation of the present methodology is that it cannot accommodate the impact of structural breaks.

  14. Under the null hypothesis, residuals are assumed to be nonstationary indicating no long run relationships. Under the alternative hypothesis, residuals are assumed to be stationary indicating a long run relationship between the variables. It is assumed that the residuals under the alternative hypothesis have common AR coefficients for the first two tests and individual AR coefficients for the second two tests. Details of panel cointegration methodology are available in Khan et al. (2016).

  15. Westerlund (2007) cointegration tests are able to accommodate serially correlated errors, country-specific intercepts, trends and slope parameters (Baltagi et al. 2017).

  16. For detail analysis of Westerlund panel cointegration test, see Persyn and Westerlund (2008).

  17. The use of the CCEMG estimator is more appropriate in estimating income elasticity of HCE, especially in developing countries because it accounts for UCFs (Kouassi et al. 2018).

  18. Under the FE estimator, labour force participation and maternal mortality rate appears to be significant with positive coefficients.

  19. We have included Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka in the SAARC group, while Indonesia, Japan, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam are included in the ASEAN group.

  20. We found no literature with regard to SAARC region that compare income elasticity of HCE with ASEAN region.

  21. Since, the FE estimator does not account for cross section dependence in the data, while the MG estimator do not take into account the effect of unobservable common correlated factors (Baltagi and Moscone 2010). Thus, we consider income elasticity of HCE based on the CCEMG estimator because it controls the effect of unobservable common factors and heterogeneity.

  22. In ASEAN countries social health insurance (SHI) has been considered as an important instrument to achieve the breadth of universal health coverage. For example, Malaysian entire population was covered by SHI, followed by Thailand (98%), Singapore (93%), the Philippines (78%), Viet Nam (65%) and Indonesia (65%) as on 2012 (Global Health Action 2015). In 2014, share of government expenditure on health care as percentage of total HCE in Thailand was 86%, followed by Japan (83.6%), Malaysia (55.2%), Viet Nam (54.06%), Korea (54%), Singapore (41.7%), Indonesia (37.8%) and the Philippines (34.3%) respectively.

  23. Baltagi et al. (2017) found estimated income elasticity less than unity after controlling for unobserved common effects for WEOG and Asia–Pacific. However, for WEOG they found insignificant income elasticity after controlling for unobserved common factors.

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  1. Department of Economics, COMSATS University Islamabad, Park Road, Chak Shahzad, Islamabad, Pakistan

    Muhammad Arshad Khan & Muhammad Iftikhar Ul Husnain

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  1. Muhammad Arshad Khan
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  2. Muhammad Iftikhar Ul Husnain
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Correspondence to Muhammad Arshad Khan.

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Khan, M.A., Ul Husnain, M.I. Is health care a luxury or necessity good? Evidence from Asian countries. Int J Health Econ Manag. 19, 213–233 (2019). https://doi.org/10.1007/s10754-018-9253-0

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  • DOI: https://doi.org/10.1007/s10754-018-9253-0

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