Most existing estimates of the macroeconomic costs of AIDS, as measured by the
reduction in the growth rate of GDP, are modest. For Africa - the continent where
the epidemic has hit the hardest - they range between 0.3 and 1.5 percent annually.
These estimates are based on an underlying assumption that the main effect of
increased mortality is to relieve pressure on existing land and physical capital.
The research conducted work by Clive Bell, a professor of economics at
the Heidelberg University, Shanta Devarajan, chief economist of the World
Bank’s Human Development network, and Hans Gersbach of Heidelberg University,
suggests this emphasis is misplaced. They argue that over the long run, the economic
costs of AIDS are almost certain to be much higher.
The research takes an innovative approach to estimating the macroeconomic costs
of HIV/AIDS. By analyzing how the economy functions over the long term, they
sought to show that AIDS not only destroys existing human capital, but also
weakens how knowledge and experiences are transmitted from one generation to
the next. Since the disease affects mostly young adults, the children of HIV/AIDS
victims are often left without one or both parents to raise and educate them.
To conduct the analysis, the researchers used an overlapping generations (OLG)
model, in which parents have preferences over current consumption and the (expected)
human capital attained by their children. Two family structures are analyzed:
‘nuclear’ and ‘pooling’, whereby under the latter all children
are cared for within an extended family. The outbreak of AIDS leads to an increase
in premature adult mortality, and if the prevalence of the disease becomes sufficiently
high, there may be a progressive collapse of human capital and productivity
(e.g., if one or both parents die while their offspring are still children,
the transmission of knowledge across generations is weakened.)
Policy options to avoid such a collapse may include: (i) spending on measures
to contain the disease and treat the infected, (ii) aiding orphans, in the form
of either income-support or subsidies contingent on school attendance, and (iii)
taxes to finance these expenditures. It should be noted the model yielded grim
results when calibrated for South Africa. In the absence of AIDS, the counterfactual
benchmark, there is modest growth, with universal education attained in three
generations. However; if nothing is done to combat the epidemic, a complete
economic collapse will occur within four generations. With optimal spending
on combating the disease, and if there is pooling, growth is maintained, albeit
at a somewhat slower rate than in the benchmark case. If pooling breaks down,
and is replaced by nuclear families, growth will be slower still, even with
the optimal combination of spending.
Maureen Lewis, a sector manager with the Bank’s Human Development network,
provided opening comments. She noted there was a disconnect between what data
suggests and what is apparent on the ground with respect to the economic impact
of AIDS. She also said that while the research by Bell, Devarajan and Gersbach
was dramatic, it was still a work in progress. Bell cited the 14th century plague
as one of the great demographic events of history, in part because it was responsible
for breaking down the feudal structure of Europe. But the plague hit all ages
and classes indiscriminately, AIDS affects mostly young adults during their
most productive years. AIDS destroys not just human capital, Bell said, but
the mechanism for building it progressively with succeeding generations. It
will have a cumulative effect over time. As the human capital is reduced, larger
quantities of physical capital (such as land) are available per person. Average
and marginal products of labor can actually rise.
The disease usually impacts the victim in five to seven years. Bell said the
premature adult mortality introduces heterogeneity in the form of inequality
in family structure. In what Bell called an idealized African classical form,
the orphans are taken into an extended family structure where the adopting parents
treat the orphans as completely equal with their own children. This pooling
of human capital offers the advantage of social insurance. Under a nuclear structure,
the surviving parent continues the care of the children or the children are
completely orphaned. Decreases in adult mortality generally increases the years
of the children’s education. The condition of the family is a significant factor
in determining education of the children. He concluded that a rise in premature
adult mortality decreases investments in education, and the proportion of households
that can best afford it. Therefore a rise in mortality may precipitate a collapse
in the economy. Orphans fall into the poverty trap immediately unless they receive
help from the state or relatives.
The hope is to avoid collapse as well as avoid inequality. The first instrument
available to any country would be to combat the disease through preventative
measures and by prolonging the life of the infected through treatment. The external
effects of such steps, Bell said, were very large. Subsidies to promote education
is an important option. This can be in the form of direct family support or
subsidies to induce parents to send their children to school. With nuclear families,
policy influences the distribution of family types through spending on combating
the disease. With pooling structures, results are more tractable analytically.
Under this structure, targeting income support will be rendered ineffective
by the altruism of the adopting parents.
The model was applied to South Africa. Its economy grew well from 1960 until
the mid-1970s when the effects of apartheid and the dissolution of the country’s
political structure began to take shape. Bell said this earlier period of growth
served as a good example of South Africa’s economic potential under optimal
conditions. Three results were derived. If all children attended school, the
South African economy would experience a productivity increase per person of
64 percent per generation. A second result found families with both parents
would have an annual income of $3400, not much above the poverty trap. According
to the data from 1960, South Africa was well above the level of $3400 and experiencing
continuous growth before the outbreak of AIDS. Looking at data from 1990, the
researchers found that 32% of males aged 15 would die before age 60, as would
22 percent of females. At this time, only 1% of the adult population was infected
by AIDS. Projecting from current data to 2010, the data suggests mortality levels
rise dramatically to 36 percent and 54 percent respectively. Only 29 percent
of children would not experience a parental loss.
In the absence of intervention, the results would be extremely tragic. Bell
set up a calibration that tied public spending to mortality. He said if the
government does nothing, the result will be the projections for 2010. If the
disease did not exist, then the data would reflect 1990 results again. An important
policy intervention would be to target prostitutes and their clients, providing
free condoms. Another is providing the infected with anti-retroviral drugs,
projected at $400 per year. Bell set out several additional policy options already
noted above. By implementing these policy options, including full-time education,
Bell projects affluence for the country by 2080. One of the policy options currently
being explored by the government of providing families with subsidies is, in
part, undermined because families spend on daily consumption needs and not fully
on their children’s education. Under this scenario, the researchers project
growth, but very slowly.
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