Below, we present various data showing the high correlation between public health care spending and domestic consumption. Selecting countries with high domestic potential is essential given that consumption growth is related to stock returns. We conclude that one of the most effective – and efficient – ways of boosting domestic consumption in emerging markets is through "efficient" government spending on health care.
A simple equation
In most developing economies, the population has little choice but to spend the bulk of its income on essentials such as children's education, medical expenses, and filial support, as well as to build a buffer against adverse life changes (see Exhibit 1). Imagine, however, if some of the income that is currently earmarked for essentials is freed up for discretionary spending. For example, what would happen if households did not need to worry about medical expenses because the government provided universal health care?
Health care is both costly and necessary, and thus represents a heavy burden on consumers where public health care is not available (see Exhibit 2). Increased public health care expenditure has a direct positive impact on consumption, through three different channels:
• Income effect: The money that a family saves from not having to pay for medical bills will be spent on other goods and services, leading to a shift in the aggregate consumption pattern. According to the World Bank, in China, for example, shifting health care expenditure from the private to the public domain through health insurance would translate into economic activity amounting to as much as 80% of the original spending.
More importantly, most of these activities would be classified under domestic activity.
• Insurance effect: With consumers assured that their medical needs are taken care of, they are likely to reduce the amount of their precautionary savings. One of the reasons often cited for China's low private consumption, which has decreased from 55% of GDP in the 1980s to less than 35% currently, is that citizens feel insecure about their financial future given the limited health care, pension, and education benefits available to them.
• Redistributive effect: As the main beneficiaries of universal health care coverage, lower-income households would gain the ability to buy goods that they previously did not have the means to acquire.
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