Financial development and health expenditure nexus: A global perspective

Rezwanul Hasan Rana, Khorshed Alam and Jeff Gow

International Journal of Finance & Economics, 2021, vol. 26, issue 1, 1050-1063

Abstract: Empirical studies have established that financial development is an essential element of economic growth. It has also been established that rising national income has a positive impact on healthcare expenditure. Therefore, an empirical question is whether financial development increases healthcare expenditure for countries at all income levels. This paper examines the relationship between the level of financial development and healthcare expenditure from a global perspective for countries at different income levels for the period of 1995–2014. Common correlated effects mean group approach was employed to account for unobserved heterogeneity and cross‐section dependence in the large panel dataset of 159 countries. Additionally, mean group and fixed‐effects estimation approaches were used to measure the robustness of the relationship. The association was tested at different levels by sub‐grouping countries based on their income. The results indicate that the relationship between financial development and health expenditure is positive and significant. However, the results fluctuate considerably across income levels. The association becomes trivial when income levels rise, with low‐income countries showing stronger correlations. Rising incomes and public health expenditure, foster increasing expenditure on health more in countries with a lower level of corruption. Lastly, the statistical outcomes observed are subject to the choice of estimation techniques. Development in the financial sector influences per capita health expenditure positively, however, the association is more prominent for lower‐income countries. Policies are proposed to direct the gains from financial development towards healthcare to maximize society's welfare.

Date: 2021
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https://doi.org/10.1002/ijfe.1835

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