The Economic Impact
of HIV/AIDS in Southern Africa
Policy Brief # 9 – 2001
by Erica Barks-Ruggles and Tsetsele Fantan and Dr. Malcom McPherson and
Since the first cases of HIV/AIDS
were reported twenty years ago, nearly 58 million people have been
infected and 22 million have died. Consensus in the international
community has grown over the past two years that HIV/AIDS poses a threat
to development, security, and economic growth. A few studies over the
last ten years have looked at the impact on workers and their employers.
With momentum building to prevent new infections and treat those already
afflicted, more information is needed to assess economic impacts and
cost efficacy of treatments.
On June 28, 2001, the Brookings
Institution, the Council on Foreign Relations, and the U.S. Agency for
International Development (USAID) sponsored a conference on measuring
the costs of HIV/AIDS and organizing responses to it. The conference
brought together researchers, business people, and policymakers to
discuss economic impacts, prevention costs, education, and treatment.
This report is a summary of the findings presented at the conference.
AIDS and Business in Southern
At the conference,
Professor Alan Whiteside of the University of Natal gave an overview of
the AIDS epidemic, which is currently centered in sub-Saharan Africa.
The African epidemic is not homogenous; Southern Africa has the worst
epidemic, and HIV prevalence there continues to rise. In Uganda,
prevalence has fallen, while in other countries it has stabilized or is
rising more slowly. The scale of the epidemic in Southern Africa is
particularly worrying given that this is the most developed part of
Africa and it was hoped Southern Africa would be the continental
powerhouse for economic development.
In 1999, sub-Saharan
Africa's GDP was $324 billion. Of this total, South Africa produced
$131.1 billion, over one third. The average sub-Saharan African per
capita annual income is $490 while in Botswana it is $3,246, South
Africa $3,170, Namibia $1,890 and Swaziland $1,350. It may be that this
relative wealth—combined with the gross inequality of incomes within
these countries, which is not reflected in the composite figures—have
played a role in the development of the epidemic.
levels are a harbinger of the AIDS epidemic, with sickness and death due
to AIDS following the HIV infection curve by several years (figure 1).
HIV prevalence can, therefore, be used to project the number of future
illnesses, deaths, and orphans, but cannot predict what the affects of
increased morbidity and mortality will be for business and national
economies in the medium and long term. At best, one can measure current
impact in the knowledge that it will get worse.
Economics, and AIDS Research Division, University of Natal
Despite the dearth
of data, there is some evidence that AIDS is already increasing the cost
of doing business. It is, in effect, a payroll tax, as companies pay
direct costs for treatment of sick employees and more expensive health
and insurance benefits, as well as the indirect costs of lower
productivity, absenteeism and increased recruitment and training costs
for replacement staff. Companies can, to some extent, shift the costs of
the epidemic onto the public sector. For example, when health and life
insurance costs rise, some companies will be forced to reduce benefits
and people will seek care from the public sector. However, in many
developing countries the public sector is dysfunctional, so the social,
health, and financial burdens often fall on households and families. In
addition, governments face the same increased mortality and morbidity
among infected staff as the private sector, reducing the public sector's
ability to maintain the expertise needed to respond to the epidemic.
Four areas need
urgent attention from researchers and the private sector:
simple and publicly available methodologies to assess the impact of
HIV/AIDS on business.
of the macroeconomic effects of the epidemic on nations,
particularly on governments and the business and investment
the consequences for small- and medium-sized businesses.
and understanding of the burden shifting between the public and
private sectors and between organizations (public or private) and
households and individuals. Several of the presentations at the
conference began to tackle these objectives, but more needs to be
done in each of these areas.
HIV/AIDS Impacts on "Capacity
Deepening," Economic Growth
Malcolm McPherson of
the Belfer Center at Harvard's Kennedy School of Government addressed
how the spread of HIV/AIDS seriously erodes human capacity and adversely
affects "capacity deepening," which is broadly defined as building upon
existing skills in order to increase productivity. Skilled personnel are
lost and valuable labor time is consumed when workers become
debilitated, and work schedules are disrupted when organizations replace
workers and managers who are ill or have died. The loss of capacity
reduces economic growth. Several aggregate models project significant
reductions in economic growth rates for African economies. These
modeling exercises typically follow a pattern of reporting "with" and
"without AIDS" scenarios. An example is the widely cited ING Barings
model produced for the July 2000 HIV/AIDS conference in Durban, which
showed that long-term economic growth in South Africa would decline 0.4
percent per year due to HIV/AIDS.
however, suggests that these studies may be too optimistic. What they
fail to consider is that by undermining human capacity, HIV/AIDS reduces
productivity, disrupts organizations, and unravels institutions. The
implication is that the epidemic's effects are more likely to be
Both theory and
practice indicate this is the case. At the aggregate level, the impact
of HIV/AIDS has elements consistent with endogenous growth theory. The
spread of HIV/AIDS reduces labor productivity, raises private and public
consumption, and thereby reduces income and savings. With lower savings,
the rate of investment falls, reinforcing the decline in economic
growth. The loss of labor productivity occurs because a larger share of
the work force becomes debilitated and dies causing organizations to
lose workers with critical skills. The phenomenon can be likened to
"running Adam Smith in reverse." Adam Smith argued that the "expansion
of the market"—typically identified as economic growth—creates
opportunities for specialization and the division of labor. The spread
of HIV/AIDS reverses that process as organizations experience
disruption, and declining income undercuts the earlier gains achieved
through specialization and the division of labor.
accelerating this trend has been the erosion of economic incentives to
deepen capacity. With current treatment protocols, the majority of
individuals in Africa who are HIV-positive (or think they may be) face
dramatically shortened life spans. This raises the opportunity cost of
additional training, because few of the costs incurred will be recouped
in higher subsequent earnings. The same logic applies to employers who
might otherwise support further training of their employees. Forbidden
by law from discriminating, employers have to assume that the average
productive life span of anyone they train will decline, which directly
reduces the incentive to support long-term training. Without such
training, capacity cannot be deepened.
So far, many
enterprises across Southern Africa have sought to minimize the direct
costs of HIV/AIDS by "shifting the burden." This can entail closing
transport and distribution divisions—where the prevalence of HIV/AIDS is
higher—reducing benefits, or shifting labor to temporary workers. Some
organizations may gain a short-term cost advantage, but in aggregate,
the attempt to "shift the burden" is a mirage. This is because with
workers, government, and the rest of society bearing the direct costs of
HIV/AIDS, resources are diverted from public services such as roads,
telecommunications, and education. Enterprises require those resources
to enhance productivity. Furthermore, with overall income growth
declining, the enterprises" future growth prospects also diminish.
For these reasons,
private enterprises need to be concerned about capacity deepening in the
public sector. Without ministries of finance, health, and education,
central banks, finance, revenue, and justice departments with skilled
staff capable of effectively administering and managing the economies,
business will suffer. This is already evident in countries such as
Zambia, Zimbabwe, and Malawi.
What are the
potential remedies? How can the bias against capacity deepening be
reversed? What form of private-public cooperation would decrease the
pressure on the diminishing supply of highly skilled workers? Several
measures should be considered:
prevention programs dramatically to protect those who are not
short-term, repeatable training courses that improve worker
efficiency and morale to help prevent further declines in
simplify work schedules to economize scarce organizational talent.
This task may require specialized technical assistance.
governments' development agendas. Currently, governments are grossly
overburdened with ambitious donor-driven initiatives, such as sector
development, poverty reduction, growth, and—ironically—"scaled up"
HIV/AIDS programs. By failing to match such initiatives to existing
capacity, they are pre-programmed to fail.
by donor agencies for technical assistance to stabilize the
operations of key organizations (e.g. finance, justice, health and
Analyzing the "AIDS Tax" on
In order to manage
the disease in their workforces, business leaders must better understand
how the epidemic will affect their employees, the impact it will have on
their firms' costs of production, and the benefits of investing in
HIV/AIDS prevention and treatment interventions. The AIDS Economics Team
of the Center for International Health (CIH) at Boston University is
undertaking a series of detailed studies of the costs of HIV/AIDS to
businesses in South Africa and Botswana that begin to address this need.
Seven firms in southern Africa from different sectors and with varying
infection rates are being studied. Results of the first three studies
have been analyzed, and the full results will be available in early
2002. The key characteristics of the first three firms and estimates of
the costs of HIV/AIDS to these firms are shown in figure 2 and figure 3.
(a) Technicians are
skilled machine operators, drivers, craftsmen, engineering assistants,
etc. They typically have both formal and informal technical training but
no university-level education. The costs for this job level are provided
as an example. Source: Research of the AIDS Economic Team, Center for
International Health, Boston University
The results in
figures 2 and 3 are the present values to the firms of new HIV
infections acquired each year. Costs incurred in the future are
discounted using each company's own real discount rate. Figure 3 shows
the liability that the firm acquires each year as a result of new
infections among employees that year.
Source: Research of
the AIDS Economic Team, Center for International Health, Boston
The results suggest
that the "AIDS tax" on these firms ranges from 3 to 11 percent of annual
salaries in 1999 and 2 to 8 percent in 2010. The variability among the
firms depends on each company's production structure and human resource
policies. For companies A and C, the direct costs of retirement and
disability benefits far outweigh all other costs and lead to a much
larger cost per new infection than experienced by Company B. For Company
B, with a much smaller cost per infection, the indirect costs associated
with absenteeism and on-the-job performance loss constitute the largest
share of the total. The reasons for this variation include differences
in retirement, death, and disability benefits; level of medical care
paid for by the firm; baseline labor productivity; and the contractual
status of unskilled workers. As a result, Companies A and C currently
bear a much larger share of the total economic burden of HIV/AIDS among
employees than Company B.
difference in their exposure to HIV/AIDS costs, the CIH research
suggests that all three companies have an opportunity to obtain positive
returns on investments in HIV/AIDS prevention and treatment
interventions. Under reasonable assumptions about the costs and
effectiveness of specific interventions, these firms will be better off
financially with interventions than without. However, better information
on the effectiveness of interventions is urgently needed to strengthen
Debswana: A Case Study of Business
Impact and Responses
Debswana is the
largest diamond mining concern in Botswana. Tsetsele Fantan, a director
of Debswana responsible for HIV/AIDS impact management, outlined the
evolution of the company's efforts to respond to the epidemic, which
began in 1988-89 when the first AIDS cases were seen at company-run
hospitals. Between 1996 and 1999 there was a significant increase in
HIV/AIDS-related health retirements and deaths. Employee deaths
associated with HIV/AIDS rose from 37.5 percent of all employee deaths
in 1996 to 48.3 percent in 1997 and 59.1 percent in 1999 (figure 4).
As a result, the
company sought to establish the level of HIV-prevalence in the workforce
to help plan for future risk reduction strategies. A voluntary anonymous
prevalence survey using saliva was conducted in 1999 to establish
prevalence levels by skill grade and age at Debswana's mines,
headquarters office and other sites. With 75 percent of the workforce
participating, the survey found that 28.8 percent of 5,261 employees
were infected. There were HIV-positive individuals at every skill and
education level, but the 30-34 year-old age group was hit hardest, with
a prevalence rate of 36.9 percent.
In 1999, Debswana
undertook a company-wide evaluation of HIV policies and programs,
including a "Knowledge and Practices" (KAP) study on prevention and
education strategies. The KAP study showed that 94 percent of employees
knew about HIV/AIDS and its transmission, but a significant percentage
(26-46 percent) still had multiple partners and practiced unsafe sex. In
addition, between September 1999 and August 2000, the company conducted
an institutional audit to assess its vulnerability to costs and impacts
associated with HIV/AIDS-related morbidity and mortality. The audit
focused on HIV-prevalence broken down by skill levels, the impact of
HIV/AIDS on employee benefits, the consequences for productivity, and
the implications for skill availability and critical functions. The
audit found an increase in costs attributable to AIDS.
As a result of these
studies, Debswana changed a number of policies and adopted a new
HIV/AIDS strategy. It identified critical positions at the core of its
mining operations, especially those where the loss of specialized
employees at a production bottleneck would cause operations to halt, and
found that only 26 percent of all jobs in the company were critical.
Employees in these positions will be targeted for specific HIV/AIDS risk
reduction strategies. Other recommendations Debswana adopted included
implementation of: a standard for HIV/AIDS management, an HIV/AIDS
competence examination for managers at key levels, and a "contractor
assurance" policy, which compels companies providing goods and services
to Debswana to have workplace HIV/AIDS prevention and education policies
and programs that will be audited regularly.
As a result of the
studies and new policies, in March 2001, Debswana approved the provision
of anti-retroviral treatment for employees living with HIV/AIDS. The
company will pay 90 percent of the cost of anti-retroviral drugs and the
related costs of monitoring viral loads and CD4 counts for the employee
and one spouse who is HIV positive for as long as the employee remains
in the employ of the company. The anti-retroviral therapy is
administered through a disease management program that ensures drugs are
used in correct combinations and with appropriate monitoring and
Problems with Data Collection,
Recommendations for Businesses and Researchers
As noted, more
information is needed on the social, political, and economic costs of
the HIV/AIDS epidemic. The paucity of current data is due in part to
several overlapping problems: a lack of comprehensive and systematic
data collection, problems with data collection methodology, and
insufficient sharing of information and data.
Time and budgetary
constraints on many researchers require them to use questionnaires
seeking historical data on issues such as skill level of employees,
health and life insurance costs, recruitment and training costs, and
absenteeism. This can significantly affect the quality and reliability
of the data. Direct access to corporate databases would eliminate the
need for questionnaires and enable more comprehensive analysis over
time, across skill levels, and between different companies in a
consistent and statistically significant manner. This would need to be
done in a manner that protects employees' privacy.
Differences in the
quality of record keeping can also make comparison studies virtually
meaningless. For example, few businesses in South Africa keep accurate
absenteeism data. In addition, many large businesses in the region split
employee records between headquarters and plant sites, and track data
differently in each location. Differences in computer systems,
exacerbated by corporate mergers, outsourcing of non-core functions, and
changes in laws and regulations also complicate data collection.
Aside from human
resource and health care professionals, most upper-level managers have
not considered how HIV/AIDS might affect their employees and companies,
so information is often not shared between divisions within companies.
Likewise, there is little information shared between businesses. Many
managers fear their companies will be "branded" if information about HIV
prevalence, and programs they have to combat it, are made public. There
are, however, some nascent efforts underway to increase inter-business
communication and to provide an environment in which businesses can
share information and experiences.
Understand the impact of AIDS on
employees, their families and their communities
Business should work
together to create an international standard for tracking information on
direct and indirect costs to businesses—including health care costs,
absenteeism, increased recruitment and training, etc.
Take action in the workplace
analyze their operations and put in place strategies for prevention,
education, and possibly treatment. Strategy development and
implementation should include all levels of the organization and unions
to ensure protection of privacy and employee rights, and to get input
and feedback on programs. Policies and programs should extend to
partners in the supply and distribution chain and to contractors.
Promote condom use and behavior
AIDS is relatively
hard to contract. Business can lead prevention efforts by making condoms
accessible and by getting employees to talk to their peers in the
workplace and the community about how to prevent the epidemic from
spreading further. Businesses should play a leadership role in the
community with outreach to families, schools, and adolescents on
businesses working together to pool data and talent can help accelerate
and streamline the fight against AIDS. Through public-private
partnerships, businesses and governments can become more efficient in
their efforts to fight this disease.
Push for change
The economic power
of the private sector gives it an important voice with policymakers
around the world. This, backed up by data, can and should be used to
fight for funding and sensible programs that will make a difference.
© Copyright 2001, The