Identifying causal relationships among education, income and health expenditures in South Asian countries

Mirza MD. Moyen Uddin, Department of Business and Economics University of New England, Australia

Taimur Sharif, Faculty of Business and Management Muscat University, Oman

Abstract: This paper examines the causal relationships among education, income, and health expenditures in the SAARC (South Asian Association for Regional Cooperation) region consisting of eight South Asian countries. The annual health expenditure (current USD), adult literacy rates and real per capita GDP (current USD) were chosen to proxy for health, education and income respectively. Time series data were obtained for all countries except Afghanistan from the online versions of the World Development Indicators, World Bank, for the period 1995-2014. The Vector Error Correction Modeling (VECM) approach was applied to establish the long run and short run relationships among these variables. The Augmented Dickey-Fuller (ADF), Phillips-Perron (P.P) tests and Johansen’s cointegration approach were also used to check time series properties and cointegration of the variables. Results demonstrate a cointegration among these variables, having positive and significant long run impacts on each other. The trace statistics and max-eigenvalue for Bangladesh (37.45, 26.29) were observed to be greater than their respective critical values (29.79, 21.13), and so do the other countries also. The adjusted coefficient of Error Correction Term (ECT) that shows the long term directional effect, is seen to be significant for Bangladesh, India, Bhutan and Pakistan. In the case of Bangladesh, health and education expenditures cause per-capita income whereas for India, Bhutan and Pakistan, education and health cause income, education and income cause health, but health and income do not cause education. Also, the ECT is significant for Maldives and Nepal where all the variables cause each other. Given South Asian governments allocate meagre shares of their annual national budgets to health and education, and even then the region manages to be the world’s fastest growing region, these findings offer thought-provoking ingredients to policy makers for human capital accumulation and making the growth process sustainable by considering education and health expenditures as useful investments.

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