The Economic Impact of HIV/AIDS Shanta Devarajan

How HIV/AIDS affects the economy Labor supply (e.g., South African labor force expected to decline by 12.8 percent by 2010) 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 risesBut: 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) Productivity losses (absenteeism, retraining workers, death benefits) Estimated to add upto 15 percent to companies’ wage bill (South Africa, Cote d’Ivoire)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 lossesBut: Large companies especially are able to adapt, reducing productivity losses

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

Previous estimates of the impact of AIDS on GDP growth (%) Arndt and Lewis (2000) South Africa -0.8 to –1.0 Bonnel (2000) 47 countries -0.7 Kambou, Devarajan and Over (1992) Cameroon -0.5 to –1.2 Over (1992) 30 countries -0.3 to –0.6 Sackey and Raparla (2000) Swaziland, Lesotho, Namibia -0.8 to –1.5

How HIV/AIDS affects the economy (cont’d) Human capital Human capital AIDS kills young adultsAIDS kills young adults Reduces incentive and means to invest in children’s educationReduces incentive and means to invest in children’s education Reduces parents’ transmission of knowledge to their childrenReduces parents’ transmission of knowledge to their children

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

South Africa: Probabilities Both alive Father dead Mother dead Both dead 1990 (no AIDS)

South Africa: Probabilities Both alive Father dead Mother dead Both dead 1990 (no AIDS) (with AIDS)

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

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

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

Kenya: Probability of premature adult mortality No AIDS AIDS

Kenya AIDS year Human capital Education Household income Human capital Education Household income

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

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