The long-run economic costs of aids: theory and an application to
South Africa
By: AIDS Economics
Date: 2003-08-14
 
 
 
 
Most existing estimates of the macroeconomic costs of Aids, as
measured by the reduction in the growth rate of GDP, are modest. For
Africa, they range between 0.3 and 1.5 per cent annually. This is
because 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 so that output per head is little
affected.


This paper argues that this emphasis is misplaced and that, with a
more plausible view of how the economy functions over the long run,
the economic costs of AIDS are almost certain to be much higher. Not
only does AIDS destroy existing human capital, but by killing mostly
young adults, it also weakens the mechanism through which knowledge
and abilities are transmitted from one generation to the next; for
the children of AIDS victims will be left without one or both parents
to love, raise and educate them.

This problem is analyzed here using 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. The
policy problem, therefore, is to avoid such a collapse. The
instruments available for this purpose are
* Spending on measures to contain the disease and treat the infected
* Aiding orphans, in the form of either income-support or subsidies
contingent on school attendance
* Taxes to finance these expenditures.

When calibrated to South Africa, the model yields the following
results. In the absence of AIDS there is modest growth, with
universal and complete education attained within three generations.
If nothing is done to combat the epidemic, however, a complete
economic collapse will occur within three 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 in the absence of AIDS. If pooling breaks down, and is replaced
by nuclear families, growth will be slower still. Indeed, if school-
attendance subsidies are not possible, growth will be distinctly
sluggish. In all three cases, the additional fiscal burden of
intervention will be large, which reinforces the gravity of the
findings.

Sensitivity analysis suggests that these findings are robust to
changes in a variety of key assumptions and parameter values
concerning mortality, the efficiency of measures taken to combat it,
and the formation of expectations. A delay in responding to the
outbreak of the epidemic, however, can lead to a collapse.