Testing the Baumol Cost Disease Hypothesis in the Health Sector of Sub-Saharan Africa

This paper takes a closer look at the well-researched topic of the determinants of health expenditure. However, as an improvement over previous studies, the current study tested the cost disease hypothesis in the healthcare sector in sub–Saharan Africa to assess the sector’s productivity. The cross-sectional units in the current study comprise forty-eight sub-Saharan African countries; spanning the period 2000 to 2020. The data was sourced from two main sources; namely, World Development Indicators and the ILOSTAT. The main variable of interest (Baumol variable) was constructed using a combination of various variables. The methodology relied on several econometric techniques i.e., fixed effect, random effects and two-stage least square estimations. The growth rate of gross fixed capital formation was used to control for the potential reverse causation between the growth rate of health expenditure per capita and the Baumol variable. Based on the empirical results from the various estimations, it appears that there is some evidence of the presence of the cost disease in the healthcare sector of sub–Saharan Africa. This effect became stronger when the endogeneity in the model was taken into consideration. However, this effect became greatly diminished after the growth rate of GDP per capita and the growth of the price level were introduced in the model. The statistical significance of the growth rate of these variables reinforces their important roles in the determination of the levels and growth in health expenditure. The confirmation of the basic Baumol model in determining the growth of health expenditure suggests that the growth of health expenditure in sub-Saharan Africa might be a result of health workers’ wages outstripping productivity in the sector. This suggests that the inelastic nature of the demand for health care is the main driver of the growth of health expenditure; thus might not be reflected in improved health care. Furthermore, policymakers need to consider changes in the price level as it may deflate the real value of the budgetary amount.