Health expenditure and economic growth in East Africa. Does institutional quality matter?

Abstract

The quality of institutions matters in enhancing the effectiveness of health expenditure on economic growth. However, East Africa as a sub region has limited studies that inform policies on health expenditure, institutional quality and economic growth. Therefore, this study sought to address this gap by incorporating the role of institutional quality in determining the effect of health expenditure on economic growth in East Africa that has been overlooked in the empirical literature. The study used panel data from the World Development Indicators, World Governance Indicators and Global Health Expenditure Database for the period 2000 – 2017 for a sample of five East African Countries. The study employed the Panel Feasible Generalized Least Square estimation technique to capture the effect of institutional quality on the relationship between health expenditure and economic growth. The study finds that the interacted term between health expenditure and institutional quality has a positive and significant effect on economic growth. In particular, a 1% increase in the health expenditures adjusted for the quality of institutions leads to a 0.113 increase in GDP per capita in East Africa. This result means that if health expenditures are adjusted for the quality of institutions, then if health expenditures increase by 100%, resulting economic growth increases by 11.3%. Therefore, the study suggests that in order to improve health expenditure effectiveness, there is need to improve the quality of institutions in East Africa. This is because good quality institutions minimize leakages of financial resources allocated to the health sector and subsequently leads to low infant mortality rates. Furthermore, East African countries and health development partners need to increase investment in health by increasing the budgetary allocations to the health sector.