Population Health and Foreign Direct Investment: Does Poor Health Signal Poor Government Effectiveness?

Abstract

This policy brief argues that poor levels of population health can deter foreign direct investment because they can act as potent signals of institutional weaknesses and, more broadly, of lower levels of government effectiveness.

The outbreak of severe acute respiratory syndrome (SARS) in 2003 in Asia brought into sharp focus the linkages between health and the macroeconomy. The economic impact of SARS was largely driven by fear and uncertainty, resulting in sharp declines in tourism and consumer confidence. Foreign direct investment (FDI) in SARS affected countries such as People's Republic of China saw a significant decline in the immediate aftermath of the outbreak. The decline in FDI, however, did not last very long: the numbers rebounded after a lag period.

Nevertheless, the SARS outbreak has brought to surface the following question: if episodic health "shocks" such as SARS can put a brake on FDI and trigger capital flight, what might be the consequences of high levels of prevalence of more endemic communicable diseases for international investment?1 From the perspective of FDI, a health shock such as SARS is likely to have economic effects akin to those seen after a political shock such as a revolution or an assassination. This is quite different from the effects of widespread endemic prevalence of other communicable diseases such as HIV/AIDS, malaria, and tuberculosis.

The latter signify low levels of human capital, lower labor productivity, higher absenteeism, and likely higher costs of operations due to health-related expenditures. More generally, widespread disease prevalence contributes to the perception of operational risk in the investment climate of a country. And, as is argued in this policy brief, poor levels of population health can deter FDI because they can act as potent signals of institutional weaknesses and, more broadly, of lower levels of government effectiveness.