Diseases and Development

This paper examines two related questions: what effects do infectious diseases exert on growth and development, and are they quantitatively important? We present evidence on the effect of health and infectious diseases on economic development using Hansen�s (2000) endogenous threshold methodology. Taking into account various proxies for infectious diseases as potential threshold variables we show that countries are clustered in regimes that obey different growth paths and thus provide direct evidence of threshold effects. Motivated by this evidence we propose an epidemiological overlapping generations model where the transmission and incidence of an infectious disease depend upon economic incentives and rational behavior. The economic cost of the disease comes from its effect on mortality (infected individuals can die prematurely) and morbidity (lower productivity and/or lower flow of utility from a given consumption bundle). Our main theoretical finding is that if infectious diseases are particularly virulent or debilitating, growth- or development-traps are possible. Numerical results from a calibrated version of the model show that threshold effects of diseases are quantitatively important and in particular, significant health interventions are required to propel disease-afflicted countries to a high-growth trajectory.