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March 20, 2006
Life expectancy and health spending have been increasing for decades the world over. This life extension trend is an important engine of growth: investment in education brings higher returns; lower mortality raises population growth. However, the speed and impact of the trend cluster are still underestimated: forecasts of life expectancy and the size of the health sector are probably still too low - making the need for adjustment in the political and business community greater than many people have thought. [more]
Live long and prosper! Health and longevity as growth drivers Global growth centres Current Issues Author Stefan Bergheim +49 69 910-31727 stefan.bergheim@db.com Editor Stefan Schneider Technical Assistant Pia Johnson Deutsche Bank Research Frankfurt am Main Germany Internet: www.dbresearch.com E-mail: marketing.dbr@db.com Fax: +49 69 910-31877 Managing Director Norbert Walter March 20, 2006 The trends of a growing health sector and ageing populations form the trend cluster “enlarging scope of life” in our Formel-G growth model. Its impact on economic growth is positive. Technological progress is the major driver for the enlarging scope of life. Constant improvements to drugs and equipment are very expensive, but they continue to lower mortality rates. The life expectancy of a newborn in Germany has risen 8 ½ years since 1960. Over the same period health spending as a proportion of GDP has doubled to 11%. Positive effect on human capital and population growth. With rising life expectancy, the pay-off period of an investment in education increases and with it the incentive to make this investment in a better and longer – indeed life-long – education. Moreover, declining mortality alters the age structure of the population: the pyramid is fortunately a relic of the past. In addition, population growth would accelerate as a result of lower mortality rates if the birth rate remained constant. Different speeds of the trends across countries. In recent years Korea, Chile and India have made up considerable ground in life expectancy relative to the leader Japan. Going forward, we expect the strongest acceleration of the overall trend cluster in China and Germany. The speed and impact of the trend cluster continue to be underestimated: forecasts of life expectancy and the size of the healthcare sector are probably still too low – the need for adjustment in the political and business arenas is greater than many people think. Live long and prosper! Health and longevity as growth drivers 45 50 55 60 65 70 75 80 85 90 95 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Highest life expectancy worldwide & extrapolation: one year older every four years Life expectancy underestimated Life expectancy of women at birth in years, UN forecasts from 2004 Sources: United Nations, Oeppen & Vaupel (2002) India China USA Japan Germany UN forecast Current Issues 2 March 20, 2006 Table of contents Page 1. “To your health!” – and to more economic growth............................................... 3 2. A powerful trend for decades.................................................................................. 4 Ever richer in years of life...................................................................................................................... 4 Sharp upturn in spending and outcomes .............................................................................................. 4 No end to the trend in sight ................................................................................................................... 6 Technology and income the key drivers................................................................................................ 7 Interplay between the trends................................................................................................................. 8 3. The positive impact on GDP growth ..................................................................................... 9 Human capital – longer pay-off period .................................................................................................. 9 Positive impact on population growth ................................................................................................... 9 Health sector increasingly capital-intensive ........................................................................................ 10 Health goods and services provided globally...................................................................................... 10 4. Successes are home-made ......................................................................................................11 Japan – a model of life expectancy and efficiency...............................................................................11 India – rapid catch-up from a low base ................................................................................................11 China – health sector destined to grow............................................................................................... 12 Germany – allowing more private involvement ................................................................................... 12 5. Framework set by politics ....................................................................................................... 13 Live long and prosper! March 20, 2006 3 Health is highly valued… … and can contribute to economic growth “Enlarging scope of life” in the DBR growth forecast model The trend cluster “Enlarging scope of life” is an element of our Formel-G model for long-term growth forecasts in 34 poor and rich countries, with the year 2020 as the forecast horizon. This publication sets out to describe the trend cluster in greater depth, to depict drivers and constraints, to explain its impact on the four drivers of growth in Formel-G and to present some country illustrations and forecasts. The implications of the trend cluster for individuals, companies and economic policy are also highlighted. The adjacent chart illustrates the elements of the Formel-G framework. The trend cluster “Enlarging scope of life” consists of the two individual trends “populations are ageing” and “health sector grows”. It is one of the six clusters in the map of trends that shape future growth. It has a positive effect on the four drivers population growth, the investment ratio, human capital and trade openness: an acceleration of the trend cluster speeds up the increase in the drivers. On the basis of the forecasts of the drivers refined by the trend analysis, the rates of growth for gross domestic product in the 34 countries modelled are calculated up to the year 2020. (Details in: Global Growth Centres 2020. Deutsche Bank Research. Current Issues, March 23, 2005) 1. “To your health!” – and to more economic growth New Year and birthday greetings almost always contain wishes for good health, and in many countries and languages toasts are offered “to your health”. This is consistent with the idea that people’s welfare depends crucially on the quantity (life expectancy) and quality (consumption level) of their lives. In both respects many countries have made enormous, mutually enhancing progress over recent decades. Health is not only highly valued by individuals, it can also contribute to more economic growth: all else being equal, population growth increases as mortality declines; and longer life expectancy creates greater incentives for better education. As Mr. Spok would say: Live long and prosper! Health is the state of physical and spiritual well-being. Or as Friedrich Nietzsche aptly remarked: “Health is the degree of sickness that still permits me to go about my essential affairs.” The health sector thus comprises all products and services that people buy to restore, improve and guard against impairment of their physical and spiritual well-being. These include, on the one hand, health expenditure in the narrower sense, for example in-patient or out-patient treatment and disease prevention (healthcare) and, on the other, expenditure on physical wellbeing in the broader sense, such as cosmetic surgery, massage, health cures and appetite suppressants (personal care). Econometric equation Drivers GDP DBR‘s analytical framework for long-term growth forecasts: Formel-G Linkage Source: DB Research Trend clusters Econometric equation Drivers GDP GDP DBR‘s analytical framework for long-term growth forecasts: Formel-G Linkage Source: DB Research Trend clusters 1 Current Issues 4 March 20, 2006 2. A powerful trend for decades The trend cluster “enlarging scope of life” has developed very strongly for decades and should continue to do so over the forecast period up to 2020 at least. In all countries, life expectancy will climb further, mortality rates will decrease and the share of total health spending in GDP will carry on rising. Ever richer in years of life The trend labelled “populations are ageing” encapsulates primarily the concept of “old” in the sense of “rich in years of life” as a result of individuals’ rising life expectancy. Of course, a society’s overall age structure also depends on the birth rate and possible cohort effects. The name of the trend cluster “enlarging scope of life” captures the appropriate medical definition of the term “old”: a person is deemed old when age-related physical and mental disabilities considerably impair day-to-day life. According to this definition the share of old people in the total population is falling steadily across the world. Studies show for both the USA and Germany that the likelihood of being health-impaired or in need of care at a certain age decreases over the decades. Some research even suggests a compression of health problems into the final years of life – which are, anyway, being reached at an increasingly old age. 1 A relatively conservative assumption would be that people today are health-impaired for just as many years as they were in the past. Consequently, as life expectancy increases the proportion of the population considered old and unable to work from a medical point of view is falling. Therefore, people do not automatically become old when they turn 65. The static definition, still used too frequently today, that everyone over the age of 65 is “old” or incapable of working stems from the 1960s, when men in the industrialised world had a life expectancy of just over 65 years. Fortunately, advertising makes more and more use of the dynamic definition of “old”, even describing those over the age of 50 as the “best agers”. As mentioned, the health sector encompasses both medically necessary treatment, such as surgery for a fractured arm, and health-preserving and not medically indicated treatment, such as massages and cosmetic surgery. In many countries the second segment in particular has been expanding very dynamically for years. The number of cosmetic plastic surgery in the US soared 24% between 2000 and 2004 to 9.2 million (see chart 4). In this field, too, America will presumably be the trendsetter for other countries. Drugs and cosmetics are another huge growth market. 2 Around USD 20 bn alone is spent on anti-depressants world-wide. Sharp upturn in spending and outcomes The evolution of the trend cluster can be measured with reference to both expenditure and outcomes. Spending reflects primarily the expansion of the health sector, while outcomes such as falling infant mortality rates and rising life expectancy mirror most importantly the trend “populations are ageing”. 1 See Ziegler and Doblhammer (2005) and Section 160 in the 2005 Report of the German Advisory Council on the Assessment of Developments in the Health Care System. 2 See Perlitz (2002). 0 2 4 6 8 10 12 14 16 1960 1970 1980 1990 2000 Health spending up sharply Source: OECD Japan USA BE Turkey DE Total expenditure in % of GDP 2 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 2000 2002 2003 2004 Cosmetic surgery is booming Treatments in the USA in millions Source: American Society of Plastic Surgeons 4 0 5 10 15 USA Switzerl. Germany Norway France Greece Canada Netherl. Portugal Belgium Australia Sweden Denmark S. Africa Italy N.Zeal. Japan UK Spain Austria Finland Ireland Turkey Mexico India China Korea Thailand 2003 1970 Sources: OECD, WHO USA and Switzerland spend most on healthcare Total expenditure in % of GDP 3 Live long and prosper! March 20, 2006 5 a) Continued steep increase in spending From 1960 to 2003 total health spending in the US surged from 5% of GDP to 15% (see chart 3). In other countries the rise was not quite so dramatic, but the trend is evident without exception in every OECD country. Since 1970 healthcare expenditure has gained on average four percentage points across the OECD. We expect the trend to continue at a similar pace on average over the next 15 years. Of the 34 countries we examined, Korea and Thailand seem to have the greatest catch-up potential. In the US a roughly 20% share of GDP is highly likely by 2020. 3 But considering the value of a human life (approximated by using expenditure on airbags or better food), the proportion of health spending there should already be 30% today. 4 Spending is presumably below the socially optimal level in many other countries as well. The state accounts for varying proportions of health spending. In Scandinavia and the UK more than 80% of total healthcare expenditure comes from the government, compared with just 34% in India and 21% in China (see chart 5). In our set of countries a high government share goes hand in hand with high life expectancy. However, this outcome is driven by some developing countries whose governments are neglecting their duties in the healthcare system. From a public sector share of around 50% it is not clear whether greater government involvement produces better or worse results. Many countries, most notably Thailand, Chile and Indonesia, have considerably raised the proportion of public sector spending since 1998. In contrast, the governments of India and China have downsized their role even more – a development that gives cause for concern in light of the rather low level of overall health expenditure. b) Better and better results Increasing life expectancy and decreasing mortality are the key results of an expanding health sector and a prerequisite for the trend of ageing populations. They have been in place in most countries for many decades. In Germany a boy born in 1870 could expect to live only 36 years on average, compared to 75 today. Life expectancy in Japan (the average of men and women) has jumped from 67.7 years in 1960 to 81.7 years – by an amazing four months a year. In China and India the rise has been even steeper (see chart 6). An important reason for this higher life expectancy has been the rapid drop in child mortality in all countries. In 1970 20% of all live- born infants in Turkey and India died within the first five years, a rate that has since fallen to 4% and 9% respectively (see chart 7). In many wealthy countries this figure is below 0.5% today, with the US trailing in this ranking given its comparatively high infant mortality rate. There still is particularly large room for improvement in India, South Africa and Indonesia. c) Funds not always spent efficiently Both expenditure on health and the outcome, such as life expectancy, have climbed strongly over the past decades – and will continue to do so in the forecast period up to 2020. The trend is thus solidly underpinned. But this says nothing about the efficiency (the output per unit of money input) of the health systems in the various 3 Hall and Jones (2004) predict a 30% share by 2050 and life expectancy of 86 years. 4 Murphy and Topel (2005) argue that additional expenditure on healthcare therefore has a high net societal value. 0 20 40 60 80 100 Sweden Norway UK Denmark Japan Germany New Zeal. France Finland Ireland Spain Belgium Portugal Austria Canada Thailand Australia Turkey Netherlands Switzerland Russia Malaysia Korea Greece Argentina Brazil Chile USA Mexico S. Africa Indonesia China India 2002 1998 Increasing state activity Public-sector share of health spending in % of total Source: WHO 5 35 40 45 50 55 60 65 70 75 80 85 1960 1967 1974 1981 1988 1995 2002 Source: WDI 2005 Japan India China USA France Life expectancy keeps rising Total, in years at birth 6 Current Issues 6 March 20, 2006 countries or about their specific strengths and weaknesses. The Fritz Beske Institut für Gesundheits-System-Forschung (healthcare systems research and development institute) has compared the performance and costs of various systems and identified particularly efficient regimes in Italy and Belgium (see chart 8). However, the level of healthcare there is clearly below that in Germany, for example. The US trails the efficiency ranking. One reason may be that the US system is under less cost pressure than the pay-as-you- go (PAYG) European systems, which constantly seek to limit the burden on contributors. 5 The US system permits far higher pay for doctors, higher prices for drugs and higher administrative spending. No end to the trend in sight In terms of the trends and future paths of the drivers in Formel-G, the question regularly arises: is there a maximum, and will the trend automatically peter out? The answer is: certainly not on our forecast horizon up to 2020 – and presumably not beyond that either. This is particularly true of the trend cluster “enlarging scope of life”. The chart on page 1 shows no deceleration of the trend in the country already featuring the highest life expectancy, Japan. Indeed, the stability of the trend can even be traced back globally to the mid- 19 th century: 6 in 1840 Swedish women led the field with life expectancy of 45 years, today Japanese women live to be 85. Over these roughly 160 years we see a stable, linear rise of three months a year in the respective leading country. The United Nations and various scientists have repeatedly forecast a levelling of the trend, but this has never occurred. However, these false predictions have had a significant impact on decisions by policymakers (e. g. on pensions) and individuals that have likewise subsequently proven wrong. Our trend analysis assumes that the trend of rising life expectancy will generally continue on a linear path, of course with country-specific differences. Indeed, the rapid development of biotechnology and genetic technologies even opens up the possibility of an acceleration of the trend. 5 Kotlikoff and Hagist (2005) make this point just as clearly as Hsiao (2000) before them. 6 Oeppen and Vaupel (2002). 0 5 1 01 52 0 Sweden Norway Japan Denmark Italy Spain Switzerland Belgium Netherlands Finland France Austria Germany Greece Portugal Korea Australia Canada Ireland UK N. Zealand Malaysia USA Chile Argentina Russia Thailand Mexico Brazil Philippines China Turkey Indonesia S. Africa India 2003 1970 Source: Human Development Report Strong drop in infant mortality world-wide Under-five mortality per 1,000 live births 7 0.0 0.5 1.0 1.5 2.0 Italy Belgium Canada Germany UK France Australia Sweden Japan Austria average Netherl. Denmark Switzerl. USA Efficient EU countries Index of health system efficiency 2001 Source: Fritz Beske Institute Ratio of healthcare index to costs. Used here: 100/original index 8 Live long and prosper! March 20, 2006 7 Technology and income the key drivers Technological progress is one of the two most important drivers for the expanding health sector and for the resultant increase in life expectancy. Among the most important fields of research are diagnostics, stem cell research, cancer treatment and gene therapy as well as health services administration. In the DBR trend map the trend of a growing health sector consequently also borders on the trend “biotechnology becomes central growth area”. New technology can both cause and reduce costs. The latter is the outcome normally expected of technological progress: producing more or producing something better with the same input. Improved medical diagnostic methods may lead to illnesses being detected earlier, making their treatment less complicated. However, more important and hence trend-determining, is cost-driving technological progress. Computer tomography scanners, for example, can cost more than EUR 1 million, placing a considerable burden on budgets up-front (see chart 9). The electronic healthcare card in Germany is an important step in the right direction, making it unnecessary each time patients seek out a new doctor to enter their allergies by hand into a complicated form. However, in Germany alone the capital outlay for electronic healthcare cards would run to about EUR 2 billion. Equipping 5,000 hospitals and 500,000 doctors with state-of-the-art information technology in the USA would cost around USD 150 bn. 7 At some stage the costs per patient will fall, but the way there is paved with heavy investment. Technological progress entails ongoing development of new products which find their market. In the US, people can record what they eat on mobile camera phones and have the calories counted by an internet-based dietician. The market for this service is enormous, considering that 30% of adult Americans and 13% of Germans are obese, with a body mass index (BMI) of 30 or above. Cardiac patients can have doctors monitor their heart rate with the aid of a mobile telephone. In an emergency the sick person can be located by GPS. The second major driver of the trend cluster is the rise in incomes. People with higher incomes can afford to spend more on healthcare. The still-controversial question, though, is whether they spend a higher proportion of their income on healthcare only because income rises. Is health a luxury good or a normal good? Economists and econometrists have been debating this issue for years and still do not seem to have reached a consensus. Our assumption is that, by itself, an increase in income results in a slightly bigger rise in health spending, although the elasticity does not appear to be very large. Another hugely important factor in the development of the health system is the political terms of reference and intervention. Irrespective of whether the state organises healthcare itself or merely sets the institutional framework, it is almost always involved. Politicians decide on the budgets allocated to the state systems. And they also decide which products may be offered on the market: does a country wish to take advantage of the progress in biotechnology? The state also determines the extent to which income differences within society lead to differences in healthcare provision. An important issue for many emerging markets governments is whether 7 The Milken Institute Review, Q4 2005, p. 79. 0 20 40 60 80 100 Spain Belgium DE Korea Japan 2003 2000 1995 1990 Rising capital intensity Source: OECD Health Data 2005 Computer tomographs per million inhabitants 9 60 65 70 75 80 85 90 2 4 6 8 10 12 14 16 Expenditure and life expec- tancy rising in tandem... Sources: OECD, UN, DBR calculations Health spending (% GDP) Life expectancy women USA, 1960 to 2003 10 60 65 70 75 80 85 90 2 4 6 8 10 12 14 16 Life expectancy Health spending (% GDP) IN JP US CN Sources: OECD, UN, Deutsche Bank Research … also accross countries 11 Current Issues 8 March 20, 2006 Health sector important for life expectancy… … but few effects in the other direction Rising life expectancy influences life planning they can succeed in setting up an adequate health system for the entire population. Interplay between the trends The two trends “health sector grows” and “populations are ageing” are neighbours and form one cluster notably because the expanding health sector, coupled with improved hygiene and education, is the crucial determinant of rising life expectancy. In the other direction, though, the impact of higher life expectancy on health spending tends to be small. Medical research clearly proves that health spending depends not on the number of years already lived, but on the remaining life expectancy. 8 The highest health expenditure always occurs in the last years of a life, irrespective of the overall life span. Or to put it another way: a 65 year-old today will certainly entail higher costs than a 25 year-old today but, in the same health system, lower costs than a 65 year-old 30 years ago. Contrary to the still widespread preconception, rising life expectancy is not a cause for the significant increase in health spending – it is a consequence. This does not, of course, rule out the possibility that some OECD countries may temporarily have to shoulder higher spending from the cohort effects when the baby boomers approach the end of their lives. On the other hand, rising life expectancy will have a significant impact on biographies as more flexible life plans increasingly replace the classic sequence of education – work/family – pension. 8 Zweifel et al (1999). Live long and prosper! March 20, 2006 9 Human capital and population increase Longer pay-off period on investment in education Innovative age rises over time Declining mortality raising median age Classical pyramid implies high mortality 3. The positive impact on GDP growth The “enlarging scope of life” has a positive impact on the four drivers of the Formel-G growth model. Human capital and the population in particular increase when life expectancy and expenditure on healthcare rise. Should the trend cluster accelerate, human capital and population will climb more quickly than in the past. Human capital – longer pay-off period A better health system and higher life expectancy have a positive impact on the evolution of human capital – measured by the average years of education – through several avenues. 9 First, healthy children can concentrate better and learn longer than sick children. They will be more successful in their early years of schooling already and thus more likely to be able to go on to further education. But a second factor appears far more important: as life expectancy rises, so the pay-off period (including the pension phase) of an investment in human capital increases. A person with only 40 years to live will certainly not remain in education until the age of 28. 10 Experience in recent decades and country comparisons today show that education systems in poor countries do not start being really successful until life expectancy exceeds 55 years. 11 In the wealthy countries people have spent about 45% of their gain in life expectancy in the past 40 years on longer education. Educational researchers have even identified a non-linear relationship: the longer people live, the higher the proportion of additionally gained life they wish to spend on education (as the rise in income is non- linear). But it is also clear that the education acquired in early years depreciates and loses value in the course of a long life. Life-long learning is therefore vital to keep the individual’s human capital high. Older people tend to be less innovative than younger people, but a 50 year-old today is presumably more innovative than a 50 year-old 30 years ago. Studies show that innovators today are on average eight years older than at the beginning of the 20 th century. 12 One reason for this could be the increase in the amount of knowledge available, which requires longer periods of study to approach the present limits of human knowledge. At a given point in time “old” people are probably less innovative on average than “young” people, but over time the innovative age seems to be advancing. Positive impact on population growth An expanding health sector leads to better health and declining mortality at all age levels. This has a marked impact on population growth, the median age, life expectancy and the number of births. If the number of births holds steady or drops only slightly, the population will grow faster than before as a result of declining mortality. The trend cluster thus has a positive effect also on the second of our four variables. However, in response to lower mortality and higher life expectancy the birth rate tends to decline as more children survive for longer and are able to support their parents in old age. This classic pattern has been observed in all countries. Declining mortality, rising life expectancy and lower birth rates will, however, dramatically alter a society’s age structure. The classical 9 See Bergheim (2005b). 10 The causality also works the other way round. Better educated people are healthier and have a higher life expectancy. 11 See Cohen and Soto (2002). 12 See Jones (2005). 60 65 70 75 80 85 90 4 6 8 10 12 14 Longer life expectancy, more education Life expectancy Years of education IN ES JP KR CN Sources: OECD, Deutsche Bank Research 12 Current Issues 10 March 20, 2006 pyramid form depicted in chart 13 (graph on the left) is by definition found only in countries with high mortality rates especially among children. 13 Happily therefore, it will increasingly become a thing of the past. A country with an equally high population of 20 million, as in the first chart, but with a lower mortality rate among its young people can therefore also have a far lower birth rate. In the middle graph of chart 13 the birth rate drops by more than one-third and the population structure becomes significantly narrower. If older people’s life expectancy also increases, the birth rate can decrease further without causing a decline in the overall population. The right-hand graph in chart 13 shows the structure of a constant population of 20 million with the German mortality rates from 2003 in long-run equilibrium. Here, the number of births is only half as high as with the “classical” pyramid. With a constant population size of 20 million the median age climbs from 24 years (pyramid) through 32 years (intermediate step) to 40 years (“German mortality”). Almost all the population forecasts entering into our Formel-G growth model are higher than the United Nations’ forecasts because Deutsche Bank Research weights improvements in the health system more heavily and expects further significant advances overall. Health sector increasingly capital-intensive The impact of the trend cluster on investment in physical capital is probably small or indirect. Since the health sector will become increasingly capital-intensive, the capital stock will increase. The number of computer tomography scanners per one million inhabitants in Germany, for example, rose from 6.4 in 1990 to 14.7 in 2003 (see chart 9). Moreover, the stronger gain in human capital will also push up the return on physical capital, so the investment ratio should pick up somewhat. Health goods and services provided globally The impact of the trend cluster on trade openness is probably small but positive as well. Markets for drugs and medical technology are globally networked. An expanding health sector will therefore also 13 For the sake of simplicity the same average mortality rate is assumed for men and women here. In fact, in most countries women have a considerably higher life expectancy. -500 -250 0 250 500 94 84 74 64 54 44 34 24 14 4 The "classical" pyramid - high mortality Population: 20 m Median age: 24 Age Women Population in '000 Men -500 -250 0 250 500 94 84 74 64 54 44 34 24 14 4 Intermediate step: better health up to 50 Population: 20 m Median age: 32 Age Population in '000 Women Me n 0 5 10 15 20 25 30 94 84 74 64 54 44 34 24 14 4 Sources: Destatis, Deutsche Bank Research Age Probability of deceasing in % "Classical" pyramid Germany 2003 Better health up to 50 Mortality in the three age structures 14 -500 -250 0 250 500 94 84 74 64 54 44 34 24 14 4 "Healthy" age structure - German mortality So urce: Deut sche B ank Research Population: Median age: 40 20 m Population in '000 13 Live long and prosper! March 20, 2006 11 Greater focus on public spending Pharma industry increasingly important foster the exchange of goods across national borders. Even health- related services are increasingly being offered globally. Examples range from dental tourism to Hungary through Ayurveda treatments in Sri Lanka to nursing homes for Japanese in the Philippines. 4. Successes are home-made Japan – a model of life expectancy and efficiency For years Japan has been the country with the highest life expectancy (see chart 15) and in 2003 it had the third lowest infant mortality rate. The government’s vision for 2030 quite rightly assumes a healthy life expectancy of 80 years and an increase of 12% in the time at people’s free disposal. Japan’s high life expectancy seems to be partly due to the relatively healthy diet and life style – only 8% of GDP is spent on the health system. The speed of the trend cluster has been exceptionally high in recent years in Japan, with life expectancy rising faster than in basically any other wealthy country and the health sector expanding strongly. Going forward, there is likely to be little change in pace. The government has identified the major weak spots and is trying to keep the health system stable in the long run with higher co- payments and reforms of the health insurance system. Given that the trend is extremely pronounced, it will come as no surprise that Formel-G predicts the highest level of human capital per head for Japan in 2020, at 15 years. But notwithstanding the further increase in life expectancy, the low birth rate will lead to a slight decrease of the population. India – rapid catch-up from a low base In our Formel-G model India is the country with the highest GDP growth in the years 2006-20. A pronounced acceleration in the trend cluster “enlarging scope of life” is one of the reasons for this forecast and for the strong growth of human capital. 14 At present, life expectancy is still very short and infant mortality relatively high. The government’s share in the anyway low health spending ranked last in 2002 at 21% (see chart 5). This is changing now. In April 2005 India introduced a value added tax of 12.5% (to replace the sales tax) and most of the extra revenue is set to be channelled into the health sector. The government report “India Vision 2020” envisages a quadrupling of the ratio of state health spending to GDP from 0.8% at present to 3.4%. The introduction of global patent standards in 2005 is bringing about change in India’s pharmaceutical sector. Instead of focusing on copying drugs, more independent research is being carried out and more in commission for firms from other countries. Indian companies are also purchasing know-how from abroad. Earlier this year, India’s Dr. Reddy bought betapharm, while in autumn 2005 there was speculation that Wockhardt, another Indian generics manufacturer, might take over a German or American rival. Wockhardt has boosted its international sales from 9% of total sales in 1993 to more than 60% in 2004, an illustration of India’s successful and prosperity- boosting integration into the global economy. 15 14 Asuncion-Mund, Jennifer (2005). India rising: A medium-term perspective. Deutsche Bank Research. International topics/India Special. May 19, 2005. 15 On the subject of openness see Neuhaus, Marco (2005). 0 5 10 15 20 25 30 35 60 65 70 75 80 85 Income and life expectancy correlate Sources: UN, World Bank Life expectancy women 2000-05; GDP per capita in 2002 in USD 1,000 PPP US IN JP CL 15 Current Issues 12 March 20, 2006 Government sets priorities in the health sector More private initiative in Germany China – health sector destined to grow We expect the most marked acceleration of the trend cluster to occur in China. After the government retreated more and more from the health sector in the past decades, the still impoverished rural population now has to pay for 90% of its health costs itself. This is presumably one reason why life expectancy in China has risen far more slowly since 1980 than in most other countries. However, the government has recognised the problems and is now setting new priorities. The 11 th Five Year Plan foresees a marked expansion in public health spending, at the expense of investment in infrastructure. Population growth, which is very low anyway because of the low birth rate, would then pick up a little, education incentives would be greater – but also the pressure on the pension systems. 16 Germany – allowing more private involvement Whereas in some emerging economies the state is not sufficiently involved in the health sector, in Germany the key to higher growth seems to lie in more private involvement. As the government seeks to prevent further rises in non-wage labour costs, revenues are the prime constraint on the health systems. The powerful acceleration in the trend cluster that we expect for Germany will therefore be driven primarily by private initiative. From higher prescription charges for drugs to the privatisation of (university) clinics to more personal expenditure on healthcare and wellness, the growth in the health sector will be financed and operated mainly by the non-government sector. If the system changes in this direction, it would mean that going forward a person’s health will depend more on his individual income – as is the case in other countries as well. 16 Trinh, Tamara (2006). China's pension system: Caught between mounting legacies and unfavourable demographics. Deutsche Bank Research. Current Issues, China Special, February 17, 2006. Live long and prosper! March 20, 2006 13 Letting growth effects unfold 5. Framework set by politics The trend cluster “enlarging scope of life” can unfold its full effect and have a positive impact on economic growth only if the appropriate social and political conditions are in place. This includes an up-to-date definition of the term “old”, a further efficient development of the health systems and ongoing adjustments to education and pension systems. a) Proper societal definition of “old” The static definition of “old” dating from the 1960s still shapes the way many societies think and act. On this measure people are old and incapable of working by the age of 65 at the latest. But this definition is medically untenable and socially and macro- economically counter-productive. A new definition will have little effect in itself, but it will smooth the way for further reforms. b) Letting health systems grow further The political challenge in all countries is to allow further growth of the health sector. In some countries the state itself must play a greater role, in others it must create more scope for private providers and demand. There is no miracle formula; each country has its own specific weaknesses and possibilities. c) Allowing the effects on the drivers to unfold The growth effects of the trend cluster can fully unfold only if the positive impact on the drivers human capital, population growth and investment is allowed to materialise. Higher life expectancy always implies a focus on life-long learning, something to which Europe recently seems to be waking up. In Germany and other EU countries the essentially positive impact of rising life expectancy on individual investment in human capital has been choked off because working life still comes to an end, as it did 45 years ago, shortly after age 60. All the increase in lifetime in Germany has been translated into longer education and retirement periods. This has not created greater incentives to further training. The EU goal of a 50% employment rate for 55 to 64 year-olds can only be an intermediate target. Sweden, Switzerland and Japan show that rates in excess of 60% are possible (see chart 16). 17 A drop in the birth rate amid declining mortality, higher life expectancy, higher education levels and higher incomes should come as no surprise. Policy-makers can mitigate the drop in the birth rate if they recognise the linkages and take timely action. d) Adjustment of pension systems Better health, reflected in low mortality rates, high life expectancy and higher productivity, has a huge impact on state and private pension systems. Given the advance in life expectancy, it is evident that the present value of a pension can be held constant only if the retirement age is raised or the monthly payment reduced. In many wealthy countries neither has happened in the state pension systems for many decades. The retirement age in Germany, for example, has remained unchanged since the 1960s at around 60, as a result of which the average length of time a pension is drawn has almost doubled (see chart 17). Even with constant monthly payments the present value of claims on the state system would 17 See Bräuninger (2005) for an in-depth discussion. 0 20 40 60 80 Sweden Norway N. Zealand Switzerl. Japan Denmark USA Korea UK Mexico Canada Australia Finland Portugal Ireland Netherl. Spain Greece Germany France Turkey Italy Belgium Austria 2004 1990 Different use of older people's potential Employment rate for 55 to 64 year-olds Source: OECD EU target 16 1960 1970 1980 1990 2000 2010 2020 6 8 10 12 14 16 18 20 22 Average: 60.5 years Years Years Latest: 61.1 60 Sources: VDR, Destatis, DBR calculations Pension period (right) Retirement age (left) Life expectancy of 61 year-olds today: 21 years Pension period extends with life expectancy 17 Current Issues 14 March 20, 2006 thus have soared. The financial dilemma facing the pension systems already today – well ahead of the retirement of the baby boomers – is the logical consequence. Stefan Bergheim (+49 69 910-31727, stefan.bergheim@db.com) Live long and prosper! March 20, 2006 15 Bibliography Bergheim, Stefan (2005a). Global growth centres 2020. Deutsche Bank Research. Current Issues, February 9, 2005. Bergheim, Stefan (2005b). Human capital is the key to growth. Deutsche Bank Research. Current Issues, August 1, 2005 Bräuninger, Dieter (2005). More jobs for older workers – against unemployment and early retirement. Deutsche Bank Research. Current Issues, October 14, 2005. Cohen, Daniel and Marcelo Soto (2002). Why are some countries so poor? Another look at the evidence and a message of hope. OECD Development Centre technical papers No. 197. Hall, Robert E. and Charles I. Jones (2004). The value of life and the rise in health spending. NBER Working Paper No. W10737. Hsiao, William (2000). What should macroeconomists know about health care policy? A primer. IMF Working Paper 00/136. Jones, Benjamin F. (2005). Age and great invention. NBER Working Paper No. W11359. Kotlikoff, Laurence J. and Christian Hagist (2005). Who’s going broke? Comparing healthcare costs in ten OECD countries. NBER Working Paper No. W11833. Murphy, Kevin M. and Robert H. Topel (2005). The value of health and longevity. NBER Working Paper No. W11405. Neuhaus, Marco (2005). Opening economies succeed. Deutsche Bank Research. Current Issues, November 11, 2005. Oeppen, Jim and James W. Vaupel (2002). Broken limits to life expectancy. Science Vol. 296, pp. 1029-1031. Perlitz, Uwe (2002). Pharmaceutical market: Run on lifestyle drugs boosted by demographic trend. Deutsche Bank Research. Current Issues, February 26, 2003. Ziegler, Uta und Gabriele Doblhammer (2005). Steigende Lebenserwartung geht mit besserer Gesundheit einher. Demografische Forschung aus erster Hand. Volume 2, No. 1. Zweifel, Peter, Stefan Felder and Markus Meiers (1999). Ageing of population and health care expenditure: a red herring? Health Economics 8, pp. 485-496. Current Issues ISSN 1612-314X All our publications can be accessed, free of charge, on our website www.dbresearch.com You can also register there to receive our publications regularly by e-mail. Ordering address for the print version: Deutsche Bank Research Marketing 60262 Frankfurt am Main Fax: +49 69 910-31877 E-mail: marketing.dbr@db.com © Copyright 2006. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”. The above information does not constitute the provision of investment advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. 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Printed by: HST Offsetdruck Schadt & Tetzlaff GbR, Dieburg Print ISSN: 1612-314X / Internet and e-mail ISSN: 1612-3158 Environmental sector China From major building site to growth market ........................................................................................February 28, 2008 China’s pension system Caught between mounting legacies and unfavourable demographics ..................................................February 17, 2006 Mexico 2020: Tequila sunrise A medium-term growth perspective .................................................................................................February 16, 2006 India’s public finances: Do they matter?...................................................................................... January 13, 2006 World steel market: Asia forging ahead....................................................................................... January 10, 2006 India as a global power?.......................................................................................................... December 16, 2005 The US’s new energy policy – barely a start ........................................................................... December 14, 2005 Expansion of regional airports: Misallocation of resources ..................................................... November 18, 2005 Opening economies succeed More trade boosts growth ............................................................................................................ November 11, 2005 Dynamic sectors give global growth centres the edge ................................................................ October 31, 2005
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