The Economic Impact of HIV/AIDS Shekhar Shah Mainstreaming HIV/AIDS Workshop Bangkok, September 12, 2005 Based on Bell, Devarajan, and Gerbasch, 2003 and 2004

Messages AIDS is different from other diseases since it affects young adults Economic impact of AIDS is not just on this generation, but the next, whose education and well-being will suffer Economic costs can be huge, and felt many years from now Early and strong action can reduce these costs

When mostly young and prime- age adults fall ill or die… Morbidity reduces job productivity, death destroys human capital Firms & economies lose trained workers Substantial public/private expenditures incurred for treatment & care Savings diverted from physical/human capital investment to treatment & replacement of workers

When mostly young and prime- age adults fall ill or die Lifetime family income and ability to invest greatly reduced Children lose love, care, guidance and knowledge of one or both parents Tax base shrinks Collaterization in credit markets becomes difficult Social cohesion and social capital decline

How HIV/AIDS affects the economy Labor supply (e.g., South African labor force expected to decline by 12.8 percent by 2010) –But: a 13 percent decline in labor supply reduces GDP by only 8 percent or so, implying that GDP per capita rises

How HIV/AIDS affects the economy (cont’d) Productivity losses (absenteeism, retraining workers, death benefits) –Estimated to add upto 15 percent to companies’ wage bill (South Africa, Cote d’Ivoire) –But: Large companies especially are able to adapt, reducing productivity losses

How HIV/AIDS affects the economy (cont’d) Public finances –Increased health expenditures, reducing public investment –Reduces GDP growth –But: Assumes that public investment would have been productive

Previous estimates of the impact of AIDS on annual GDP growth rates (%) -0.8 to –1.5 Swaziland, Lesotho, Namibia Sackey and Raparla (2000) -0.3 to – countries Over (1992) -0.5 to –1.2 Cameroon Kambou, Devarajan and Over (1992) countries Bonnel (2000) -0.8 to –1.0 South Africa Arndt and Lewis (2000)

How HIV/AIDS affects the economy Human capital –AIDS kills young adults –Reduces incentive and means to invest in children’s education –Reduces parents’ transmission of knowledge to their children

Implications Children’s ability to invest in their children’s education is lower, and so on… Vicious cycle Previous estimates of impact of AIDS may seriously underestimate the long-run impact

Overlapping-generations model Λ t = family’s human capital at t s=state of family (father dies, mother dies, etc.) z(s)Λ t (s) = transmission of knowledge from parents to children e=amount of education Then: Λ t+1 = z(s)Λ t f(e) + 1

Overlapping generations model (cont’d) Note that e is the result of the family solving : Max EU (c t, Λ t+1 ) s.t. y=α[Λ t + 2(1-e)] Increase in probability of premature adult mortality lowers both Λ t and Λ t+1

For assumptions underlying this phase diagram, see Bell, Devarajan, Gerbasch, 2004 Dynamics of overlapping generation model

South Africa: Probabilities (no AIDS) Both dead Mother dead Father dead Both alive

South Africa: Probabilities (with AIDS) (no AIDS) Both dead Mother dead Father dead Both alive

Zimbabwe: Probabilities (with AIDS) (no AIDS) Both dead Mother dead Father dead Both alive

Effect of AIDS (with pooling) Household income Education Human capital year No AIDS

Effect of AIDS Household income Education Human capital Household income Education Human capital yearAIDS No AIDS

Policy responses Spend on public goods to reduce premature mortality –Need additional spending of 3-4% of GDP per year to restore growth Lump-sum subsidies to families –Modest growth restored School-attendance subsidies –Rapid growth restored

Kenya: Probability of premature adult mortality AIDS No AIDS

Kenya Household income Education Human capital Household income Education Human capital yearAIDS No AIDS

India Overall prevalence rate <1% BUT: Six states have generalized epidemics (>1% prevalence reported in prenatal clinics) In one of these states (Tamil Nadu), percentage of truckers paying for sex rose in 2002 (to 21%) –Only 37% of them used condoms In Orissa, 61% of women have never heard of AIDS

HIV Estimates : India 1981 to No. estimated as HIV infected (in millions) Year

Cumulative Number of AIDS cases in India December, 2004 (n=1,02,733) Year No. of AIDS cases

HIV Prevalence at ANC Site <1 HIV Prevalence at ANC Site 1-2 HIV Prevalence at ANC Site 2-3 HIV Prevalence at ANC Site >=3 Source: NACO’s Sentinel Surveillance data: ANC sites (2001, 2003) Sub National Epidemics More Serious

Source:UNAIDS Percent of infected adults South Africa Thailand Year Note: Thailand‘s aggressive HIV control program has hept the infection rate relatively low over the past decade. South Africa did not implement an HIV control program and the rate climbed precipitously. HIV/AIDS in South Africa and Thailand Effect of intervention You are HERE

Possible regional scenarios Containment and zero growth by 2007, i.e. the Indian official goal is met Epidemic continues – generalized epidemic in 6 Indian states, western Nepal, and concentrated epidemics elsewhere among vulnerable groups at high risk Full blown epidemic in large parts of the region

Research underway in India Long-term economic impact – Indian Statistical Institute, New Delhi Costing the Free ART Program of the Government of India – Institute of Economic Growth Others – NCAER, NACO, etc.

Conclusions AIDS is different from other diseases since it affects young adults Economic costs can be huge, and felt many years from now Economic impact of AIDS is not just on this generation, but on next as well Early and strong action can reduce these costs Educate and generate policy and client demand Use knowledge & research to drive supply of sensible program design & implementation

References Bell, C., S. Devarajan, and H. Gerbasch, 2004 “Thinking about the Long-run Economic Costs of AIDS” in The Macroeconomics of HIV/AIDS, ed. by Markus Haacker, Washington DC: International Monetary Fund. Bell, C., S. Devarajan, and H. Gerbasch, 2003 “The Long-run Economic Costs of AIDS: Theory and an Application to South Africa,” The World Bank, Policy Research Working Paper No Das, Sanghamitra, A. Mukhopadhyay and T. Ray, 2005 “The Economic Impact of an HIV/AIDS Epidemic in India—Long term Analysis: a Model,” Planning Unit, Indian Statistical Institute, New Delhi Gupta, Indrani et al, 2005 “Costing of the Free ART Programme of the Government of India, Phase I Report,” and ‘Terms of Reference: Costing the Free ART Programme of the Government of India,” Health Policy Research Unit, Institute of Economic Growth, Delhi, 2005.