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Pei-Ju Liao and Chong Kee Yip
In the past century, many developing countries have experienced rapid economic development, which is usually associated with a process of structural transformation and urbanization. Rural–urban migration, shifting the labor force from less productive agricultural sectors to more productive industrial sectors in cities, plays an important role in the growth process and thus has drawn economists’ attention. For instance, it is recognized that one of the important sources of China’s growth miracle is rural–urban migration.
At the early stage of economic development, an economy usually relies on labor-intensive industries for growth. Rural–urban migrants thus provide the necessary labor force to urban production. Since they are more productive in industrial sectors than in agricultural sectors, aggregate output increases and economic growth accelerates. In addition, abundant migrants affect the rates of return to capital by changing the capital–labor ratio. They also change the skill composition of the urban labor force and hence the relative wage of skilled to unskilled workers. Therefore, rural–urban migration has wide impacts on growth and income distribution of the macroeconomy.
What are the forces that drive rural–urban migration? It is well understood that cities attract rural migrants because of better job opportunities, better career prospects, and higher wages. Moreover, enjoying better social benefits such as better medical care in cities is another pull factor that initiates rural–urban migration. Finally, agricultural land scarcity in the countryside plays an important role on the push side for moving labor to cities.
The aforementioned driving forces of rural–urban migration are work-based. However, rural–urban migration could be education-based, which is rarely discussed in the literature. In the past decade, it has been proposed that cities are the places for accumulating human capital in work. It is also well established that most of the high-quality education institutions (including universities and specialized schools for art and music) are located in urban areas. A youth may first move to the city to attend college and then stay there for work after graduation. From this point of view, work-based migration does not paint the whole picture of rural–urban migration. In this article, we propose a balanced view that both the work-based and education-based channels are important to rural–urban migration. The migration story could be misleading if any of them is ignored.
Philip DeCicca, Donald S. Kenkel, Michael F. Lovenheim, and Erik Nesson
Smoking prevention has been a key component of health policy in developed nations for over half a century. Public policies to reduce the physical harm attributed to cigarette smoking, both externally and to the smoker, include cigarette taxation, smoking bans, and anti-smoking campaigns, among other publicly conceived strategies to reduce smoking initiation among the young and increase smoking cessation among current smokers. Despite the policy intensity of the past two decades, there remains debate regarding whether, and to what extent, the observed reductions in smoking are due to such policies. Indeed, while smoking rates in developed countries have fallen substantially over the past half century, it is difficult to separate secular trends toward greater investment in health from actual policy impacts. In other words, smoking rates might have declined in the absence of these anti-smoking policies, consistent with trends toward other healthy behaviors. These trends also may reflect longer-run responses to policies enacted many years ago, which also poses challenges for identification of causal policy effects. While smoking rates fell dramatically over this period, the gradient in smoking prevalence has become tilted toward lower socioeconomic status (SES) individuals. That is, cigarette smoking exhibited a relatively flat SES gradient 50 years ago, but today that gradient is much steeper: relatively less-educated and lower-income individuals are many times more likely to be cigarette smokers than their more highly educated and higher-income counterparts. Over time, consumers also have become less price-responsive, which has rendered cigarette taxation a less effective policy tool with which to reduce smoking. The emergence of tax avoidance strategies such as casual cigarette smuggling (e.g., cross-tax border purchasing) and purchasing from tax-free outlets (e.g., Native reservations in Canada and the United States) have likely contributed to reduced price sensitivity. Such behaviors have been of particular interest in the last decade as cigarette taxation has roughly doubled cigarette prices in many developed nations, creating often large incentives to avoid taxation for those who continue to smoke. Perhaps due to the perception that traditional policy has been ineffective, recent anti-smoking policy has focused more on the direct regulation of cigarettes and smoking behavior. The main non-price-based policy has been the rise of smoke-free air laws, which restrict smoking behavior in workplaces, restaurants, and bars. These regulations can reduce smoking prevalence and exposure to secondhand smoke among nonsmokers. However, they may also shift the location of smoking in ways that increase secondhand smoke exposure, particularly among children. Other non-tax regulations focus on the packaging (e.g., the movement towards plain packaging), advertising, and product attributes of cigarettes (e.g., nicotine content, cigarette flavor, etc.), and most are attempts to reduce smoking by making it less desirable to the actual or potential smoker. Perhaps not surprisingly, research in the economics of smoking prevention has followed these policy developments, though strong interest remains in both the evaluation of price- and non-price policies as well as any offsetting responses among smokers that may undermine the effectiveness of these regulations. While the past two decades have provided fertile ground for research in the economics of smoking, we expect this to continue, as governments search for more innovative and effective ways to reduce smoking.
Dominic Hodgkin and Hilary S. Connery
Drug and alcohol use disorders, also called substance use disorders (SUD), are among the major health problems facing many countries, contributing a substantial burden in terms of mortality, morbidity, and economic impact. A considerable body of research is dedicated to reducing the social and individual burden of SUD.
One major focus of research has been the effectiveness of treatment for SUD, with studies examining both medication and behavioral treatments using randomized, controlled clinical trials. For opioid use disorder, there is a strong evidence base for medication treatment, particularly using agonist therapies (i.e., methadone and buprenorphine), but mixed evidence regarding the use of psychosocial interventions. For alcohol use disorder, there is evidence of modest effectiveness for two medications (acamprosate and naltrexone) and for various psychosocial treatments, especially for less severe alcohol use disorder syndromes. An important area for future research is how to make treatment more appealing to clients, given that client reluctance is an important contributor to the low utilization of effective treatments.
A second major focus of research has been the availability of medication treatments, building on existing theories of how innovations diffuse, and on the field of dissemination and implementation research. In the United States, this research identifies serious gaps in both the availability of SUD treatment programs and the availability of effective treatment within those programs. Key barriers include lack of on-site medical staff at many SUD treatment programs; restrictive policies of private insurers, states, and federal authorities; and widespread skepticism toward medication treatment among counseling staff and some administrators. Emerging research is promising for providing medication treatment in settings other than SUD treatment programs, such as community mental health centers, prisons, emergency departments, and homeless shelters.
There is still considerable room to make SUD treatment approaches more effective, more available, and—most importantly—more acceptable to clients.
The Effect of Education on Health and Mortality: A Review of Experimental and Quasi-Experimental Evidence
Titus Galama, Adriana Lleras-Muney, and Hans van Kippersluis
Education is strongly associated with better health and longer lives. However, the extent to which education causes health and longevity is widely debated. We develop a human capital framework to structure the interpretation of the empirical evidence and review evidence on the causal effects of education on mortality and its two most common preventable causes: smoking and obesity. We focus attention on evidence from randomized controlled trials, twin studies, and quasi-experiments. There is no convincing evidence of an effect of education on obesity, and the effects on smoking are only apparent when schooling reforms affect individuals’ track or their peer group, but not when they simply increase the duration of schooling. An effect of education on mortality exists in some contexts but not in others and seems to depend on (i) gender, (ii) the labor market returns to education, (iii) the quality of education, and (iv) whether education affects the quality of individuals’ peers.
Ayman Chit and Paul Grootendorst
Drug companies are profit-maximizing entities, and profit is, by definition, revenue less cost. Here we review the impact of government policies that affect sales revenues earned on newly developed drugs and the impact of policies that affect the cost of drug development. The former policies include intellectual property rights, drug price controls, and the extension of public drug coverage to previously underinsured groups. The latter policies include regulations governing drug safety and efficacy, R&D tax credits, publicly funded basic research, and public funding for open drug discovery consortia.
The latter policy, public funding of research consortia that seek to better understand the cellular pathways through which new drugs can ameliorate disease, appears very promising. In particular, a better understanding of human pathophysiology may be able to address the high failure rate of drugs undergoing clinical testing. Policies that expand market size by extending drug insurance to previously underinsured groups also appear to be effective at increasing drug R&D. Expansions of pharmaceutical intellectual property rights seem to be less effective, given the countervailing monopsony power of large public drug plans.
Chao Gu, Han Han, and Randall Wright
The effects of news (i.e., information innovations) are studied in dynamic general equilibrium models where liquidity matters. As a leading example, news can be announcements about monetary policy directions. In three standard theoretical environments—an overlapping generations model of fiat currency, a new monetarist model accommodating multiple payment methods, and a model of unsecured credit—transition paths are constructed between an announcement and the date at which events are realized. Although the economics is different, in each case, news about monetary policy can induce volatility in financial and other markets, with transitions displaying booms, crashes, and cycles in prices, quantities, and welfare. This is not the same as volatility based on self-fulfilling prophecies (e.g., cyclic or sunspot equilibria) studied elsewhere. Instead, the focus is on the unique equilibrium that is stationary when parameters are constant but still delivers complicated dynamics in simple environments due to information and liquidity effects. This is true even for classically-neutral policy changes. The induced volatility can be bad or good for welfare, but using policy to exploit this in practice seems difficult because outcomes are very sensitive to timing and parameters. The approach can be extended to include news of real factors, as seen in examples.
Hope Corman, Dhaval Dave, and Nancy E. Reichman
Prenatal care, one of the most frequently used forms of healthcare in the United States, involves a series of encounters during the gestational period, educates women about pregnancy, monitors existing medical conditions, tests for gestational health conditions, and refers expectant mothers to services such as support groups and social services. However, an increasingly methodologically rigorous literature suggests that the effects of prenatal care timing and quantity on birth outcomes, particularly low birthweight, are modest at the population level. A review and synthesis of the literature suggests that the questions typically being asked may be too narrow and that more attention should be paid to the characterization of infant health, characterization of the content and quality of prenatal care, potential heterogeneous effects, potential indirect effects on health behaviors that may benefit offspring, potential long-term effects, potential spillover effects (i.e., on mothers and their subsequent children), effects of preconceptional and lifetime care, and intergenerational effects.
The literature on the employment effects of minimum wages is about a century old, and includes hundreds of studies. Yet the debate among researchers about the employment effects of minimum wages remains intense and unsettled. Questions have arisen in the past research that, if answered, may prove most useful in making sense of the conflicting evidence. However, additional questions should be considered to better inform the policy debate, in particular in the context of the very high minimum wages coming on line in the United States, about which past research is quite uninformative.
Florence Jusot and Sandy Tubeuf
Recent developments in the analysis of inequality in health and healthcare have turned their interest into an explicit normative understanding of the sources of inequalities that calls upon the concept of equality of opportunity. According to this concept, some sources of inequality are more objectionable than others and could represent priorities for policies aiming to reduce inequality in healthcare use, access, or health status.
Equality of opportunity draws a distinction between “legitimate” and “illegitimate” sources of inequality. While legitimate sources of differences can be attributed to the consequences of individual effort (i.e. determinants within the individual’s control), illegitimate sources of differences are related to circumstances (i.e. determinants beyond the individual’s responsibility).
The study of inequality of opportunity is rooted in social justice research, and the last decade has seen a rapid growth in empirical work using this literature at the core of its approach in both developed and developing countries. Empirical research on inequality of opportunity in health and healthcare is mainly driven by data availability. Most studies in adult populations are based on data from European countries, especially from the UK, while studies analyzing inequalities of opportunity among children are usually based on data from low- or middle-income countries and focus on children under five years old.
Regarding the choice of circumstances, most studies have considered social background to be an illegitimate source of inequality in health and healthcare. Geographical dimensions have also been taken into account, but to a lesser extent, and more frequently in studies focusing on children or those based on data from countries outside Europe. Regarding effort variables or legitimate sources of health inequality, there is wide use of smoking-related variables.
Regardless of the population, health outcome, and circumstances considered, scholars have provided evidence of illegitimate inequality in health and healthcare. Studies on inequality of opportunity in healthcare are mainly found in children population; this emphasizes the need to tackle inequality as early as possible.
Widely used modified least squares estimators for estimation and inference in cointegrating regressions are discussed. The standard case with cointegration in the I(1) setting is examined and some relevant extensions are sketched. These include cointegration analysis with panel data as well as nonlinear cointegrating relationships. Extensions to higher order (co)integration, seasonal (co)integration and fractional (co)integration are very briefly mentioned. Recent developments and some avenues for future research are discussed.
Mental illnesses are highly prevalent and can have considerable, enduring consequences for individuals, families, communities, and economies. Despite these high prevalence rates, mental illnesses have not received as much public policy commitment or funding as might be expected. One result is that mental illness often goes unrecognized and untreated. The resultant costs are felt not only in healthcare systems, but across many other sectors, including housing, social care, criminal justice, welfare benefits, and employment.
This article sets out the basic principles of economic evaluation, with illustrations in this mental health context. It also discusses the main practical challenges when conducting and interpreting evidence from such evaluations.
Decisions about whether to spend resources on a treatment or prevention strategy are based on whether it is likely to be effective in avoiding, reducing, or curing symptoms, improving quality of life, or achieving other individual-level outcomes. The economic evaluation question is whether the outcomes achieved are sufficient to justify the cost that is incurred in delivering the intervention.
An economic evaluation has five elements: clarification of the question to be addressed; specification of the intervention to be evaluated and with what alternative it is being compared; the outcomes to be measured; the costs to be measured (including the cost of implementing the intervention and any savings that might accrue); and finally, how outcome and cost findings are to be blended to make a recommendation to the decision-maker. Sometimes, if an evaluation finds that one intervention has better outcomes but higher costs, then the evaluation should also how one (the outcomes) might be trade-off for the other (the costs).
The article illustrates how economic evaluations have been undertaken and employed to address a range of questions, from the very strategic issue to the more specific clinical question. The purpose of the study can, to some extent, determine the type of evaluation that is needed.
Examples of evaluations are given in a number of areas: perinatal maternal mental illness; parenting programs for conduct disorder; anti-bullying programs in schools; early intervention services for psychosis; individual placement and support; collaborative care for physical health problems; and suicide prevention. The challenges of economic evaluation are discussed, specifically in the mental health field.
Knut Are Aastveit, James Mitchell, Francesco Ravazzolo, and Herman K. van Dijk
Increasingly, professional forecasters and academic researchers in economics present model-based and subjective or judgment-based forecasts that are accompanied by some measure of uncertainty. In its most complete form this measure is a probability density function for future values of the variable or variables of interest. At the same time, combinations of forecast densities are being used in order to integrate information coming from multiple sources such as experts, models, and large micro-data sets. Given the increased relevance of forecast density combinations, this article explores their genesis and evolution both inside and outside economics. A fundamental density combination equation is specified, which shows that various frequentist as well as Bayesian approaches give different specific contents to this density. In its simplest case, it is a restricted finite mixture, giving fixed equal weights to the various individual densities. The specification of the fundamental density combination equation has been made more flexible in recent literature. It has evolved from using simple average weights to optimized weights to “richer” procedures that allow for time variation, learning features, and model incompleteness. The recent history and evolution of forecast density combination methods, together with their potential and benefits, are illustrated in the policymaking environment of central banks.
Sherry Glied and Richard Frank
Mental health economics addresses problems that are common to all of health economics, but that occur with greater severity in this context. Several characteristics of mental health conditions—age of onset, chronicity, observability, and external effects—make them particularly economically challenging, and a range of policies have evolved to address these problems. The need for insurance—and for social insurance—to address mental health problems has grown. There is an expanding number of effective treatments available for mental health conditions, and these treatments can be relatively costly. The particular characteristics of mental health conditions exacerbate the usual problems of moral hazard, adverse selection, and agency. There is increased recognition, in both the policy and economics literatures, of the array of services and supports required to enable people with severe mental illnesses to function in society’s mainstream. The need for such non-medical services, generates economic problems of cross-system coordination and opportunism. Moreover, the impairments imposed by mental disorders have become more disruptive to the labor market because the nature of work is changing in a manner that creates special disadvantages to people with these conditions. New directions for mental health economics would address these effects.
Eduardo Levy Yeyati
While traditional economic literature often sees nominal variables as irrelevant for the real economy, there is a vast body of analytical and empirical economic work that recognizes that, to the extent they exert a critical influence on the macroeconomic environment through a multiplicity of channels, exchange rate policies (ERP) have important consequences for development.
ERP influences economic development in various ways: through its incidence on real variables such as investment and growth (and growth volatility) and on nominal aspects such relative prices or financial depth that, in turn, affect output growth or income distribution, among other development goals. Additionally, ERP, through the expected distribution of the real exchange rate indirectly, influences dimensions such as trade or financial fragility and explains, at least partially, the adoption of the euro—an extreme case of a fixed exchange rate arrangement—or the preference for floating exchange rates in the absence of financial dollarization. Importantly, exchange rate pegs have been (and, in many countries, still are) widely used as a nominal anchor to contain inflation in economies where nominal volatility induces agents to use the exchange rate as an implicit unit of account. All of these channels have been reflected to varying degrees in the choice of exchange rate regimes in recent history.
The empirical literature on the consequences of ERP has been plagued by definitional and measurement problems. Whereas few economists would contest the textbook definition of canonical exchange rate regimes (fixed regimes involve a commitment to keep the nominal exchange rate at a given level; floating regimes imply no market intervention by the monetary authorities), reality is more nuanced: Pure floats are hard to find, and the empirical distinction between alternative flexible regimes is not always clear. Moreover, there are many different degrees of exchange rate commitments as well as many alternative anchors, sometimes undisclosed. Finally, it is not unusual that a country that officially declares to peg its currency realigns its parity if it finds the constraints on monetary policy or economic activity too taxing. By the same token, a country that commits to a float may choose to intervene in the foreign exchange market to dampen exchange rate fluctuations.
The regime of choice depends critically on the situation of each country at a given point in time as much as on the evolution of the global environment. Because both the ERP debate and real-life choices incorporate national and time-specific aspects that tend to evolve over time, so does the changing focus of the debate. In the post-World War II years, under the Bretton Woods agreement, most countries pegged their currencies to the U.S. dollar, which in turn was kept convertible to gold. In the post-Bretton Woods years, after August 1971 when the United States abandoned unilaterally the convertibility of the dollar, thus bringing the Bretton Woods system to an end, the individual choices of ERP were intimately related to the global and local historical contexts, according to whether policy prioritized the use of the exchange rate as a nominal anchor (in favor of pegged or superfixed exchange rates, with dollarization or the launch of the euro as two extreme examples), as a tool to enhance price competitiveness (as in export-oriented developing countries like China in the 2000s) or as a countercyclical buffer (in favor of floating regimes with limited intervention, the prevalent view in the developed world). Similarly, the declining degree of financial dollarization, combined with the improved quality of monetary institutions, explain the growing popularity of inflation targeting with floating exchange rates in emerging economies. Finally, a prudential leaning-against-the-wind intervention to counter mean reverting global financial cycles and exchange rate swings motivates a more active—and increasingly mainstream—ERP in the late 2000s.
The fact that most medium and large developing economies (and virtually all industrial ones) revealed in the 2000s a preference for exchange rate flexibility simply reflects this evolution. Is the combination of inflation targeting (IT) and countercyclical exchange rate intervention a new paradigm? It is still too early to judge. On the one hand, pegs still represent more than half of the IMF reporting countries—particularly, small ones—indicating that exchange rate anchors are still favored by small open economies that give priority to the trade dividend of stable exchange rates and find the conduct of an autonomous monetary policy too costly, due to lack of human capital, scale, or an important non-tradable sector. On the other hand, the work and the empirical evidence on the subject, particularly after the recession of 2008–2009, highlight a number of developments in the way advanced and emerging economies think of the impossible trinity that, in a context of deepening financial integration, casts doubt on the IT paradigm, places the dilemma between nominal and real stability back on the forefront, and postulates an IT 2.0, which includes selective exchange rate interventions as a workable compromise. At any rate, the exchange rate debate is still alive and open.
Gerard J. van den Berg and Maarten Lindeboom
Modern-day famines are caused by unusual impediments or interventions in society, effectively imposing severe market restrictions and preventing the free movement of people and goods. Long-run health effects of exposure to famine are commonly studied to obtain insights into the long-run effects of malnutrition at early ages. This line of research has faced major methodological and data challenges. Recent research in various disciplines, such as economics, epidemiology, and demography, has made great progress in dealing with these issues. Malnutrition around birth affects a range of later-life individual outcomes, including health, educational, and economic outcomes.
Alfred Duncan and Charles Nolan
In recent decades, macroeconomic researchers have looked to incorporate financial intermediaries explicitly into business-cycle models. These modeling developments have helped us to understand the role of the financial sector in the transmission of policy and external shocks into macroeconomic dynamics. They also have helped us to understand better the consequences of financial instability for the macroeconomy. Large gaps remain in our knowledge of the interactions between the financial sector and macroeconomic outcomes. Specifically, the effects of financial stability and macroprudential policies are not well understood.
Financial protection is claimed to be an important objective of health policy. Yet there is a lack of clarity about what it is and no consensus on how to measure it. This impedes the design of efficient and equitable health financing. Arguably, the objective of financial protection is to shield nonmedical consumption from the cost of healthcare. The instruments are formal health insurance and public finances, as well as informal and self-insurance mechanisms that do not impair earnings potential. There are four main approaches to the measurement of financial protection: the extent of consumption smoothing over health shocks, the risk premium (willingness to pay in excess of a fair premium) to cover uninsured medical expenses, catastrophic healthcare payments, and impoverishing healthcare payments. The first of these does not restrict attention to medical expenses, which limits its relevance to health financing policy. The second rests on assumptions about risk preferences. No measure treats medical expenses that are financed through informal insurance and self-insurance instruments in an entirely satisfactory way. By ignoring these sources of imperfect insurance, the catastrophic payments measure overstates the impact of out-of-pocket medical expenses on living standards, while the impoverishment measure does not credibly identify poverty caused by them. It is better thought of as a correction to the measurement of poverty.
One of the most fundamental results in health economics is that a greater socio-economic status is associated with better health outcomes. However, the experience of financial pressure and lack of resources transcends the notion of low income and poverty. Families of all income categories can experience financial pressure and lack of resources. This article reviews the literature examining the relationship between financial strain and various health outcomes. There are three main approaches to the measurement of financial strain found in the research literature, each one capturing a slightly different aspect: the family’s debt position, the availability of emergency funds, and inability to meet current financial obligations.
There are two main hypotheses explaining how financial strain may affect health. First, financial strain indicates a lower amount of financial resources available to individuals and families. This may have a dual impact on health. On the one hand, lower financial resources may lead to a decrease in consumption of substances such as tobacco that are harmful to health. On the other hand, lower financial resources may also negatively affect healthcare access, healthcare utilization, and adherence to treatment, with each contributing to a decline in health. Second, financial strain may produce greater uncertainty with regard to the availability of financial resources at present as well as in the future, thereby resulting in elevated stress, which may, in turn, result in poorer health outcomes. Examining the relationship between financial strain and health is complicated because it appears to be bidirectional. It is not only the case that financial strain may impact health but that health may impact financial strain.
The research literature consistently finds that financial strain has a detrimental impact on a variety of mental health outcomes. This relationship has been documented for a variety of financial strain indicators, including non-collateralized (unsecure) debt, mortgage debt, and the inability to meet current financial obligations. The research on the association between financial strain and health behavior outcomes is more ambiguous. As one example, there are mixed results concerning whether financial strain results in a higher likelihood of obesity. This research has considered various indicators of financial strain, including credit card debt and the inability to meet current financial obligations. It appears that both among adults and children there is no consistent evidence on the impact of financial strain on body weight. Similarly, the results on the impact of financial strain on alcohol use and substance abuse are mixed.
A number of significant questions regarding the relationship between financial strain and health remain unresolved. The majority of the existing studies focus on health outcomes among adults. There is a lack of understanding regarding how family exposure to financial strain can affect children. Additionally, very little is known about the implications of long-term exposure to financial strain. There are also some very important methodological challenges in this area of research related to establishing causality. Establishing causality and learning more about the implications of the exposure to financial strain could have important policy implications for a variety of safety net programs.
Alexandrina Stoyanova and David Cantarero-Prieto
Long-term care (LTC) systems entitle frail and disabled people, who experience declines in physical and mental capacities, to quality care and support from an appropriately trained workforce and aim to preserve individual health and promote personal well-being for people of all ages. Myriad social factors pose significant challenges to LTC services and systems worldwide. Leading among these factors is the aging population—that is, the growing proportion of older people, the main recipients of LTC, in the population—and the implications not only for the health and social protection sectors, but almost all other segments of society. The number of elderly citizens has increased significantly in recent years in most countries and regions, and the pace of that growth is expected to accelerate in the forthcoming decades. The rapid demographic evolution has been accompanied by substantial social changes that have modified the traditional pattern of delivery LTC. Although families (and friends) still provide most of the help and care to relatives with functional limitations, changes in the population structure, such as weakened family ties, increased participation of women in the labor market, and withdrawal of early retirement policies, have resulted in a decrease in the provision of informal care. Thus, the growing demands for care, together with a lower potential supply of informal care, is likely to put pressure on the provision of formal care services in terms of both quantity and quality. Other related concerns include the sustainable financing of LTC services, which has declined significantly in recent years, and the pursuit of equity.
The current institutional background regarding LTC differs substantially across countries, but they all face similar challenges. Addressing these challenges requires a comprehensive approach that allows for the adoption of the “right” mix of policies between those aiming at informal care and those focusing on the provision and financing of formal LTC services.
Difei Geng and Kamal Saggi
Foreign direct investment (FDI) plays an important role in facilitating the process of international technology diffusion. While FDI among industrialized countries primarily occurs via international mergers and acquisitions (M&As), investment headed to developing countries is more likely to be greenfield in nature; that is, it involves the establishment or expansion of new foreign affiliates by multinational firms. M&As have the potential to yield productivity improvements via changes in management and organization structure of target firms, whereas greenfield FDI leads to transfer of novel technical know-how by initiating the production of new products in host countries as well as by introducing improvements in existing production processes.
Given the prominent role that multinational firms play in global research and development (R&D), there is much interest in whether and how technologies transferred by them to their foreign subsidiaries later diffuse more broadly in host economies, thereby potentially generating broad-based productivity gains. Empirical evidence shows that whereas spillovers from FDI to competing local firms are elusive, such is not the case for spillovers to local suppliers and other agents involved in vertical relationships with multinationals. Multinationals have substantially increased their investments in research facilities in various parts of the world and in R&D collaboration with local firms in developing countries, most notably China and India. Such international collaboration in R&D spearheaded by multinational firms has the potential to accelerate global productivity growth.