Health care is a sector with exceptionally high rate of value added

Monday, 29. August 2011, 11:43

Branches, which expanded in Slovak economy in the past, often had similar disadvantages: their production had low rate of value added, so undoubtful benefit of these branches to economic growth was connected with „turning“ a huge mass of goods. Health care has got other character: it has an unusually high rate of value added and its potential expansion would substantionally contribute towards better economic growth.

Exceptionally above-average share of value added…

Health care and social help belongs to branches with high rate of appreciation of inputs and high rate of value added. It can be proven by supply and use tables (last available mirror the year 2007). We must accept here combining health care and social help to one sector for a purpose of such a statistics, so further we simply talk about the “sector of health care“.

The share of value added on the volume of production (so-called rate of value added) in the whole economy of SR is 39%. It means, that for producing 100 EUR of production there must be consumed even 61 EUR of intermediate consumption and there is generated 39 EUR of value added. These 39 EUR is transformed into individual forms of incomes. In health care sector is this ratio completely different compared to the whole economy. The ratio of intermediate consumption (intensity on intermediate consumption) is only at the level 35,4% and the share of value added is even 64,6% – Figure 1. It means substantionally higher rate of appreciation of inputs and thus substantionally higher rate of value added. Actually, we are aware of the fact, that structure of this value added has a beauty mistake: it is to a high extent composed of wages and to a low extent composed by operating surplus (which is a category very close to profit). But it is not fatal.

It is noteworthy to notice the intensity on intermediate consumption and the rate of value added in these sectors, which recorded strong expansion in the last decade, and formed to a large extent the dynamics and structure of Slovak economy (automobile industry and production of electronics). The rate of value added in these sectors is substantionally low and these sectors are very intense on inputs (extremely high share of intermediate consumption). If they want to substantionally contribute to the value added of a country, these sectors must attain huge turnover (huge volume of production) and thereby consume also huge volumes of inputs (i.e. intermediate consumption).

For generating a same unit of value added needs health care approximately five times lower turnover than the branch of manufactturing of motor vehicles and eight times lower turnover than the branch of manufacturing radio, television and communicating devices.

Of course, for objectivity we need to mention, that expansion of such industrial branches, as manufacturing of automobiles, caused a boom in supplying branches, which operate with higher rate of value added. This way arised a large segment of induced activities with higher rate of value added than in primary activity. But here we don’t deal with characteristics of „induced“ activities, only with characteristics of primary activity. We can assume, that also the boom in health care would induce expansion in supplying networks with interesting parameters of value added.

Figure 1: Intensity on intermediate consumption and the rate of value added (SR, 2007)

Source: own calculations with data of Eurostat

… with below average intensity on fuel and energies

From the total intermediate consumption we further choose the consumption of energies. Health care is below-average intense on hydrocarbon fuels and also on supplies of energy from network industry (Figure 2). Such proportions of intensities of production in health care are in accordance with the vision of diminshing the energetical intensity of Slovak economy. But it is an exceptionally wage-demanding sector (it binds relatively high proportion of labor force, which even by below-average wage level means high wage intensity). Because wages are part of value added, there exists a clear relationship between high wage intensity and high rate of value added.

Wage-intense production is for the quality of economic growth substantionally better than energetically- and intermediate consumption-intense production.

Figure 2 : Energetic and wage intensity (SR, 2007)

Source: own calculations with data of Eurostat

It looks similar also in more developed economy

In order to assure ourselves, that our statements are not wrongly made on the basis of potentionally extreme and deformed values for SR, we take into account also the results for Germany.

We discover similar characteristics of health care sector (even with unequal concrete values):

  • significantly below-average intensity on intermediate consumption and above-average rate of value added
  • below-average intensity on fuels and also energies supplied by network branches
  • exceptionally above-average wage intensity

This easy confrontation with the data from Germany allows us to assume, that:

  1. Values from Slovakia are not some unacceptable abnormality. It supports our statements.
  2. Expected convergence of Slovak economy towards developed economies of EU doesn’t change anything on our statements about particular types of difficulty or about the rate of value added in health care. Also in typical developed economy are stated proportions similar.

Figure 3: Intensity na intermediate consumption and the rate of value added (Germany)

Note: from data from the year 2007

Source: own calculations with data of Eurostat

Figure 4: Energetic and wage intensity (Germany)

Description: http://www.hpi.sk/cdata/Charts/Makro/2011-03-makro4.png

Note: from data from the year 2007

Source: own calculations with data of Eurostat

Expansion of such branches as health care leads to better economic growth

Modern economic policy has abandoned the hunting for maximum possible economic growth. It considers also the quality of growth: for example if this growth doesn’t loot the natural resources and doesn’t damage environment (if the growth is “green“), if the economic growth contributes to the quality of life, if it gives a chance for inclusion of different (even disadvantaged) classes of population, if it gives space for enforce intellectual wealth. (But we do not identify with those individuals, who enforce distinct adjectives for economic growth, which borders with programming of development.)

We can suppose, that the expansion of health care contributes to qualitatively better economic growth. Expansion of economic activities in health care sector:

  1. contributes to „green growth“ with its below-average energetic intensity.
  2. contributes to sustainable growth by below-average intensity on intermediate consumption and thereby it saves inputs
  3. better contributes to the generation of incomes of society with its high rate of value added.

Moreover, what the mentioned data do not talk about, the growth of this sector is perceived as a contribution to competitiveness of economy (by the development of a man and human capital).

Attractive economic environment also in such sectors, as health care is, can spontaneously yield more and better economic growth than those piles of political documents, which were made on the theme “sustainable“, “green“ or “intelligent“ economic growth.

Source of statistical data:

http://epp.eurostat.ec.europa.eu/portal/page/portal/esa95_supply_use_input_tables/data/workbooks