Value-of-life economics

May 27, 2020

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One of the toughest jobs for economists and development finance professionals is to ascertain the value of a human life in an economic development model. How can one put a price on the loss of human life as that leads to not only economic but also psychological and societal losses?

However, the modern business world and decision-making are dominated by hard numbers and a search for objective parameters that can give humans non-subjective factors to reach decisions. Hence, the concept of the economic value of human life has been in vogue since at least the 1990s. The concept helps in decision like investing in vital assets such as hospitals, highways, emergency services and disaster management. Social projects are rarely profitable financially. If the economic value of life analysis leads to positive socio-economic returns, then investments in social projects with financial losses but social returns still make sense.

In light of the Covid-19 pandemic, the ensuing debate of economic loss versus human-life loss has brought the concept of the economic value of human life to the forefront. Myriad studies are citing different methods to highlight the case for or against lockdowns. Studies that have been referenced in Pakistan have used the value of statistical life (VSL) to ascertain the economic loss of lockdown versus the loss of life in a herd immunisation scenario.

Policymakers need to develop localised methodologies to analyse data as their decisions have major consequences for hundreds of millions of human beings

VSL is defined by the US Environment Protection Agency (EPA) as follows: “Suppose each person in a sample of 100,000 people was asked how much he or she would be willing to pay for a reduction in their individual risk of dying of one in 100,000, or 0.001 per cent, over the next year. Since this reduction in risk would mean that we would expect one fewer death among the sample of 100,000 people over the next year on average, this is sometimes described as one statistical life saved. Suppose that the average response to the hypothetical question was $100, then the total dollar amount that the group would be willing to pay to save one statistical life in a year would be $100 per person × 100,000 people, or $10 million.”

VSL is an erroneous measure to apply as it is derived from the insurance risk concept, which is not prevalent in the developing world as opposed to the developed world. Moreover, owing to the purchasing power parity (PPP) difference in the developing and developed worlds, the measure further deflates the value of VSL for the developing world.

Even the EPA, which is a premier agency in common societal risk-return evaluation in the United States, is moving away from VSL to the value of mortality risk (VMR).

The above methodology has given extremely deflated numbers for the economic value of loss saved by lockdowns in the developing world, which has pushed the case for no lockdown or herd immunisation. The most cited and utilised study by Viscusi and Masterman(2017) assigns a VSL of $0.25 million to Pakistani residents and $9.63m to US residents. Data and cases like these are pushing the case for no lockdown or ease in lockdowns. Therefore, we see the herd immunisation strategy being implicitly deployed in some of the developing countries.

In Pakistan, we have also deployed methodologies to ascertain the economic value of a life saved by the commissioning of a development/infrastructure project. For example, how a lower number of accidents after the construction of a highway or improved accessibility to health care after the commissioning of a hospital leads to positive socio-economic outcomes.

We extrapolate cumulative economic earnings on per-capita PPP basis of an average life saved owing to a new facility/project commissioning to arrive at the economic value of a human life.

Under this methodology, we deduct the average age from life expectancy, leading to the average years of life — in Pakistan’s case, this is approximately 44 years — owing to the commissioning of the facility. Then we utilise the real wage growth rate to extrapolate the PPP-based per-capita value over the life of the individual.

The data needed for this exercise is easily available on the websites of international organisations like the World Bank.

Based on that, Pakistan has an economic value of life equal to $1.08m as opposed to $3.21m in the United States. This is in contrast to the VSL methodology where the difference was a multiplier of 39 as opposed to three in this methodology.

The difference is largely due to utilising the concepts of PPP, regional real wage growth rate and actual average life expectancy after being saved.

To understand our economy better, we need to develop localised methodologies to analyse and infer data. This methodology is not discussed to highlight that the decision to ease the lockdown is a wrong one. Instead, it is to highlight that our policymakers need to dig deeper into data and analytics to fully fathom the methodology behind any research report or recommendation as their decisions have major life consequences for hundreds of millions of human beings.

The writer is CEO of PPP Support Facility

Published in Dawn, The Business and Finance Weekly, May 25th , 2020