Why Does Health Expenditure Negatively Affect Economic Growth in Pakistan? An Institutional Inefficiencies Perspective.

Abstract

Health spending has been considered as one of the most critical investments in human capital and a significant source of long-run economic growth. But numerous developing economies have shown through empirical research that the relationship between health expenditure and economic performance is weak, insignificant and even negative. This paper examines the reasons why health spending impacts negatively on the economic growth of Pakistan in the years 1990- 2024 with a focus on institutional inefficiencies. Based on annual time-series data and autoregressive distributed lag (ARDL) bounds-testing method, the study approximates the short-run and long-run correlation of economic growth, health expenditure, institutional quality, education expenditure, financial development, and foreign direct investment. The findings reveal that health spending negatively impacts in the short-run and long-run economic growth with a statistically significant effect and institutional quality with a positive and significant effect. These results indicate that weak institutions hamper the effectiveness of spending on health, so that it cannot result in productivity gains and economic growth. The paper is also relevant to the health economics and institutional literature by showing that health spending in isolation does not translate to benefits of growth without effective governance, accountability and service delivery arrangements. The implications of the policy focus on institutional reforms, greater efficiency in health expenditure and a change in expenditure growth to outcome-oriented health policies.

Keywords: health expenditure; institutional quality; economic growth; governance; ARDL; Pakistan