The Economic Impact of the HIV Epidemic
by
Desmond Cohen
EXECUTIVE SUMMARY
This paper has three main objectives.
1. To identify and analyze the primary channels through
which human immunodeficiency virus (HIV) reveals its
impact on economic and social systems. A model is
developed to show that the main effects will be on the
level of Net Savings, with consequences for the rate
of investment, the rate of economic growth and the
level of Gross National Product (GNP) per capita;
and on the size of the Effective Labour Supply, which
has critical implications for what can be produced,
and under what conditions of production.
2. To establish the economic case for effective policies
for HIV prevention, and to place this analysis within
the framework of the social-economic impact of the
epidemic.
3. To review a selection of methodologies and empirical
evidence on the impact of HIV on households,
productive sectors and government. The economic and
social impacts of HIV are shown to be pervasive, with
all sectors of economic activity and all segments of
society affected by the epidemic. The case is made for
focusing policy interventions at the levels of the
community and households, where the costs of HIV will
be concentrated, and where policies for behaviour
change need to be made effective.
INTRODUCTION
It is almost a Sisyphean task to write a short and useful
paper about the diverse ways in which HIV impacts on
economic and social systems. Although it is readily
agreed that HIV is a health problem it is not
generally seen as a developmental one. Thus one
objective of this paper is to shift perceptions. It
will achieve a great deal if it deepens understanding
of the ways in which HIV changes development prospects
of diverse countries. It is unfortunate that the
social sciences have as yet done little to analyze the
linkage between social and economic phenomena and HIV,
especially in terms of those factors that are:
- crucial
in the spread of HIV;
- critical
for prevention;
- determinant
in their economic and social impact.
These are matters to which I return in my conclusions.
The plan of this paper is to:
- develop
a model that displays the multitude of ways in
which HIV affects the economy;
- show
schematically why it is critical to put in place
effective policies for prevention early in order
to pre-empt inevitable social, economic and
psychological costs later;
- illustrate
some of the methodologies already used to estimate
the economic costs of HIV, with empirical results
of such studies;
- to
establish some general conclusions.
HIV AND THE MACRO ECONOMY
It is important to note that the relationship is a two-way
one: HIV affects the economy, and the economic system
affects the level and distribution of HIV, for
example, the clustering of HIV infection in
urban-rural areas or poor and non-poor populations. An
important example of the latter is that of labour
migration where push-pull variables lead to labour
redistribution, both domestically and internationally.
Poverty and poor economic prospects are often key variables
in the decision to migrate. While the evidence is not
conclusive, there is empirical support for the
existence of a strong positive relationship between
migrant labour flows and the spread of HIV. This in
part reflects the younger age of migrant populations
and the fact that there are both female and male
specific migrations. It also reflects the relaxation
of social norms and the new and often risky behaviours
adopted by migrants.
Although this paper analyses the effect of HIV on the
economy, it is a relatively simple matter to use the
model of Figure 1 (not available) for exploring
the reverse relationship.
The place to start exploring relationships is the box
labeled HIV at the centre of Figure 1, entitled
"A Model of the Economic Impact of HIV",
then move to the two quadrants A1 and A2. The
connection between A1 and A2 is the box labeled
effective labour supply. Thus one of the two important
ways in which HIV affects the economy is through
reducing both the quantity and the quality of the
labour available to produce output, that is, GNP. This
is because HIV results in higher morbidity and higher
mortality in particular age groups. The latter reduces
what can be produced through the application of labour
to other productive factors, such as land and capital.
The term "effective" is used to capture both
quantitative and qualitative change. There is a
reduction in the numbers of people in the major age
groups that supply labour to the formal and informal
sectors, and to measured and unmeasured activities.
Women's unpaid domestic household labour, which is
ignored by national accounting conventions, is an
example of the latter. The quality of the labour force
changes, and there is a new mix of the skilled and
unskilled, with falling numbers of experienced workers
in all sectors of economic activity.
In those societies that experience rising adult mortality,
the passing on of acquired skills and knowledge, which
has been such a major factor in the growth of labour
productivity, diminishes. The capacity for the
transfer of knowledge and of technical skills from
worker to worker, and between generations, will be
reduced. These are processes that have been taken for
granted in the past, but that are now threatened by
HIV. Yet they are an intrinsic part of the effective
labour supply, and as such play a critical role in its
determination over time.
Quadrant A 1: The Sources of Labour
The effect of HIV is to reduce the working population,
which could worsen the dependency ratio. More children
and elderly people will have to be supported by a
smaller active labour force. It is not clear whether
external labour flows will add to or subtract from the
total working population. This factor could go either
way. In some cases the most able and internationally
most mobile labour could leave a country. There is
also the possibility that a country could attract
migrants, thus relieving some of its labour shortages,
especially of skilled and professional workers.
The changing composition of the labour force is given by
the boxes representing changing skill, education and
experience of those available to produce output of all
kinds, whether included or excluded by the GNP
accounts. These factors will generally interact so as
to cause a lower level of labour productivity, leading
to a decline in the GNP growth rate.
The output of the economy will certainly be reduced by HIV
and there will be a loss of potential production. If
outputs not conventionally included in the GNP, such
as women's work, are also considered, then the losses
of potential output are even greater. Under these
circumstances, it is inevitable that the rise of per
capita GNP will be slower than it would otherwise have
been in the absence of HIV. There is, however, a real
possibility that under certain circumstances national
output may actually decline. In such cases the GNP/per capita
will fall and so will the standard of living as
measured by such social indicators as, for example:
- a
decline in life expectancy;
- reduced
enrollments in schools;
- higher
infant mortality.
Quadrant A 2: The Uses of Labour
This quadrant takes the effective labour supply and
identifies the uses to which this labour is put by the
economy. Some of the labour force may be unemployed or
under-employed and this is shown by the box. In so far
as this is the case, then under conditions of
intensified labour constraints caused by HIV it
becomes even more important to follow policies for
fully utilizing this labour.
Today, in many developing countries there is a good deal of
formal unemployment and under-employment. This often
reflects a mismatch between the types of skills and
educational level in demand and those present in the
labour force. It also reflects shortages of
complementary inputs, such as capital and foreign
exchange, as well as demand constraints in many
countries associated with Structural Adjustment
Programmes (SAPs).
Many of these factors would continue to operate, even to be
exacerbated by the impact of HIV. Thus, while the
working population may be falling there may co-exist
both unemployed and under-employed labour. What is
different is that the social cost of under-utilizing
the available labour is raised as labour constraints
are intensified.
Quadrant A2 also shows the possible uses of the effective
labour supply, in terms of public and private uses,
between formal and informal sectors, and its
industrial distribution. Any analysis of the effects
on the economy of the falling and changing labour
supply would need to disaggregate in this way and
consider how each of these users of labour would be
affected.
To take two examples: A mining industry that employs lots
of skilled labour would find its costs rising through
increasing illness and higher training costs caused by
HIV. Similarly agricultural producers, faced by a
falling labour supply, may switch from cash crops
which are labour intensive to lower value-added food
crops. This would reduce incomes, lower foreign
exchange earnings for the economy, and lower tax
yields for government. Shifts of production away from
exports will inevitably reduce import capacity, with
consequent effects on imports of raw materials, fuel,
capital goods and so on. Shortages of critical imports
will thus constrain the level of GNP, and of domestic
employment, and intensify those forces causing
cumulative economic decline.
In all cases where there is a falling effective labour
supply attempts will be made to economize on the use
of labour by substituting:
- more
plentiful labour (unskilled) for less plentiful
(skilled), subject to this being technologically
possible;
- other
inputs in production for labour, such as capital
and/or land, also subject to technological
constraints and the availability of finance,
including foreign exchange, to meet the costs of
such adjustments.
All this will take time. There is the real possibility that
the economy as a whole, and some sectors in
particular, will exhibit adjustment problems so that
employment, incomes and output will be constrained,
that is, lower. These adjustment costs can be
partially offset by appropriate public and private
policies. For example, advance planning for shortages
of skilled and professional labour, and targeting
credit programmes to remove critical bottlenecks in
the production process, such as additional credit for
pesticides and fertilizers in agriculture.
The other main way in which the economy will be affected by
HIV is through the effect on the volume and uses of
savings. For a developing country the quantity of
savings available, and how these are employed will
determine the rate of growth of GNP. The argument is
that there exist many productive investment
opportunities but that the level of savings, and
possibly shortages of essential labour, constrains the
rate of development. Savings are both a critical
factor in the growth of an economy and a constraint.
There are many reasons to believe that the effects of
HIV will be to reduce total savings, and in so far as
these decline there will be less investment, less
productive employment, lower incomes, a slower rate of
GNP growth, and possibly a lower level of GNP.
It should be noted that national savings are the outcome of
what happens to Domestic Savings and the balance of
capital inflow and outflow. That is to say, whether on
balance the economy receives savings from overseas in
the form of overseas development assistance and
private overseas investment or the opposite where
capital outflow exceeds capital inflow.
How important net capital inflow is as a contribution to
savings, and thus to domestic investment, varies
between countries. In the case of countries suffering
from HIV, the issue is whether this contribution will
tend to rise or fall, thus assisting in the
maintenance of national savings capacity or the
opposite. It could go either way. It seems more
probable that less foreign savings will be net
available in the aggregate, and that this will be a
further depressive force for developing countries.
While it may be the case that an individual country such as
Uganda may currently be able to attract an increasing
volume of mainly official assistance (savings),
induced by the problem of HIV, this seems unlikely to
be the general case, nor one which is likely to be
sustained. Rather it reflects the advanced state of
the epidemic in Uganda, an historical situation that
will be eroded as other countries begin to display
similar HIV-related conditions. Externally supplied
savings may decline in volume and will certainly fall
relative to needs. Also, it seems inevitable that
domestic savings will decline as all productive
sectors are affected by the epidemic. Quadrants B3 and
B4 explore these linkages.
Quadrant B 3: Sources of Income
This quadrant looks at the sources of savings to the
economy. As can be seen, these come from foreign
lending and private overseas investment minus any
offsetting capital outflow, including capital flight.
Domestic savings will be the outcome of the difference
between domestic incomes and current, that is,
consumption expenditures for each of the main sectors
of the economy: government, business and households.
In the boxes the various sources of incomes by broad
category for each sector are identified. Obviously
each sector can add to its total capacity to spend by
borrowing. This, however, entails the use of savings
generated by others, including foreign savings. Each
sector can also add to its current capacity to spend
by disposing of assets, the sales of land, houses, and
other personal assets. This would be a redistribution
of assets and does not add to the flow of savings
available to the economy. There are obvious limits
both to borrowing and to asset sales as ways of
financing expenditures, as is also true of the
inflationary financing of government expenditure. In
order to establish what is likely to happen to
Domestic Savings it is necessary to consider what will
happen to incomes, and thus how different sectors will
be affected by HIV. To take two examples.
- Many
households will lose one or more productive
members through adult mortality so that family
income will decline.
- In
the case of government the revenues available will
fall as the growth rate of the economy declines,
and perhaps as a consequence of changes in the
composition of national output. For example, away
from highly taxed traded goods, imports and
exports, to the production of lower value added
non-traded goods, such as food.
Quadrant B 4: Uses of Income
As we have seen the level of national savings depends on
domestic income less domestic expenditure on current
output plus net savings from overseas. If, as a
consequence of HIV, current consumption expenditures
rise relative to income then there will be a lower
domestic savings rate, and fewer domestic resources
will be available to finance investment.
For investment to be maintained there would have to be a
rise in net foreign inflows of capital sufficient to
offset any decline in domestic savings, an outcome
which seems improbable. An important factor in
generating direct investment by foreign companies in
several Asian economies over the past two decades has
been the availability of low cost and plentiful labour.
(Malaysia and Thailand offer good examples.) HIV has
the potential for changing the costs of such labour as
well as its availability. This investment from outside
has been a critical element in the transformation and
development of these economies, and any reduction will
have severe implications for economic performance.
In these circumstances a decline in national savings,
partly domestic and partly external in origin, will
lead to a fall in the rate of investment, which will
cause a decline in the GNP growth rate. The forces
reducing domestic savings come partly from the side of
incomes, those factors depressing domestic income
growth, and partly from the side of expenditure, those
factors raising domestic consumption expenditures.
Additional national spending on health caused by HIV
would raise domestic consumption expenditure.
The focus in Quadrant B4 is on precisely those
factors that will cause domestic current expenditures
to increase relative to domestic incomes. Again the
emphasis is on the changing pattern and levels of
expenditures, both of a current and of a capital
(investment) category. Why might the pattern and
levels of the main expenditure categories change as a
result of HIV? To take a few examples:
- In
the case of the Business Sector there will be a
rise in labour costs as productivity declines due
to higher morbidity and increased absenteeism, and
additional training costs will be incurred as
labour turnover increases. Other health and social
expenditures will also rise, so that current
outlays of firms, both public and private, will
increase as a proportion of total expenditure.
Under these circumstances the resources available
to firms (savings) for financing capital
expenditures will be reduced. Yet this will be
precisely the opposite of what needs to happen,
that is, additional investment in both machines
and human resources to maintain output rates.
- The
Government as an employer will be similarly
affected. Its current expenditures will in general
be raised by HIV, especially on health, and it
will also need to increase budget allocations to
deal with increasing numbers of orphans and an
intensification of poverty. It will also need to
spend at a higher rate to replenish the losses of
human resources caused by higher adult mortality.
- In
the case of Households, there may well be problems
of maintaining food supplies, in both quantity and
quality. In many cases there will be decline of
family incomes because of higher adult morbidity
and mortality, and additional expenditures on
health.
Overall there are strong grounds for thinking that
expenditures on current output will increase so that
fewer resources are set aside for capital formation,
that is, domestic savings will decline so that less
investment is possible.
The overall conclusion seems unavoidable. All sectors of
the economy will feel the impact of the epidemic and
will inescapably have to incur additional costs:
economic, social and psychological. There is no way
that an economic calculus can estimate these total
costs. Indeed as is apparent from the above, even the
purely economic costs as conventionally estimated are
inevitably a significant underestimation.
This follows from two assumptions commonly made by
economics.
Firstly, the practice of ignoring non-marketed outputs in
the estimation of GNP. Essentially this means ignoring
the contribution of women, who will be at least as
affected by HIV as men.
Secondly, the presumption that at high levels of infection
the economic system functions as normal, but with a
lower level of performance (lower GNP). When in fact
the impact on the economic, social and political
systems may be fundamental and structural. The
consequences of system collapse are not something that
economists can predict or even comprehend. Such
collapse, however, may pose a threat to the continued
functioning of some countries with high rates of
seroprevalence. It follows that many of the estimates
of the economic costs of HIV are partial at best, and
as such represent a significant underestimation of the
scale of the problem facing many developing countries.
AVOIDING THE COST OF AIDS: WHY PREVENTION IS CRUCIAL
This ought to be self evident as a strategy. Nevertheless,
it is clear from the policies followed by many
countries that they only dimly understand why early
activities for effective prevention are absolutely
critical for avoiding the economic, social and
psychological costs of HIV. Activities implemented now
that focus on behaviour change and that are based on a
realistic understanding of the changes required to
reduce the spread of infection, will generate enormous
benefits in terms of the avoidance of future costs.
This is standard cost/benefit analysis. As such it is
very familiar ground for economists: small costs
incurred today will generate enormous benefits in
terms of costs avoided in the future. Ministries of
finance and of planning need to take this critical
rule into account when allocating funds.
Allocating funds for an epidemic such as HIV is in theory
no different from any other decision about the use of
public moneys. Except, however, that the expenditure
will predate by many years the problem it is intended
to forestall. This requires foresight and the
willingness to look into the distant future. It
demands an understanding of why, and in what ways, HIV
poses a challenge to economic and social development.
For governments, it means focusing on the long term
benefits of public policy. And to do so in situations
where the short term problems appear, and often are,
overwhelming.
Even with the narrowest definition of the economic costs of
HIV: health costs plus foregone output due to early
mortality (see pages 13-14), the return on investment
in the prevention of HIV transmission far exceeds that
on conventional capital investment. One study, for
Thailand, puts the yield on such investment at 17
times the budgetary outlay [Myers et al., 1991].
To try and estimate the future costs of HIV is no easy
task. In part this is because prediction of the
disease itself is fraught with known and unexpected
difficulties. Although Part 3 does give some idea
of the scale of costs entailed, the objective of this
Section is to put the case for prevention in a purely
schematic form. This is done in Figure 2, which
sets out the proportional cost of delaying the start
of an effective HIV programme. Note the following
points about Figure 2:
(a) The costs shown on the right hand side are proportional
costs at year 30 of the epidemic. These are
notional costs, but are nevertheless real. These are
not costs that can be estimated now, nor likely to be
able to be predicted in the future. Looking back in
time historically we may be able to make reasonable
estimates of the narrowly economic costs inflicted on
a country by HIV. Even this would entail fairly heroic
assumptions, including the counter-factual case of
what would have been the path of development in the
absence of HIV.
(b) The difference in cost levels depends crucially on the
stage that the epidemic has reached before an
effective programme is implemented. This is
self-evident. In the limiting case where effective
policies for prevention are put in place at the start
of the epidemic then the numbers infected and affected
will be small, and the economic and social costs
easily containable. If on the other hand there is
delay in the implementation of policies for prevention
to stage 2, when people are already ill and
dying, then costs will be higher because more people
will be infected and affected. Health and costs of
care will be greater, there will be more survivors in
need of support, and the output losses more
significant. Because there will be greater adult
mortality there will be a greater loss of potential
output.
(c) The costs of starting an effective programme rise with
the stage of the epidemic because there will be more
sectors affected. In other words delay raises the
costs of intervention itself.
(d) The cost at 30 years is greater the later an
effective programme is started because there are more
people infected, and there will be a commitment then
to meeting the costs of the impact on those infected.
(e) The different cost levels at 30 years may differ
from each other by factors of 10 or more.
"May" is the operative word, in that at this
point in time we just do not know.
The inescapable conclusion is that there is a
disproportionate advantage in starting effective HIV
programmes early.
MEASURING THE ECONOMIC COSTS
The following is not intended to be comprehensive, but
rather to illustrate some of the alternative
methodologies that investigators have used to estimate
the economic costs of HIV. Most of the empirical work
which has been done has been on high seroprevalence
countries in Africa.
Very little is known about the costs elsewhere in the
developing world, although this is now being remedied
for some countries in Asia. In some cases it is
necessary to predict what the impact will be on
households from observing how these have responded to
similar crises in the past. What is clearly needed, if
policies are to be properly targeted, is a great deal
of empirical work. Less at the macro level than at the
sectoral, industrial and household levels. The
following gives a flavour of what is known and
provides some idea of how some empirical work has been
conducted. No attempt is made to be comprehensive in
the coverage of the available literature.
Macro Approaches
Here I want to make reference to three studies that
illustrate alternative approaches. The first is a
recent piece of economic modelling by Cuddington [1991],
also reported in World Bank [1991]. The approach
taken is to predict what would have been the
performance of the main economic aggregates for
Tanzania over the years 1985-2010 in the absence of
HIV, and to then estimate how economic performance
would be changed by superimposing particular
assumptions with respect to the level of HIV on the
base run of the model. Obviously it is possible to run
the model with alternative HIV assumptions about the
structure of the model. For example, with more
disaggregation to reflect urban/rural and
industrial/agricultural production structures.
A prior problem, of course, in attempting to estimate the
long-term effects on the economy of HIV is to be able
to predict the likely course of the epidemic. It would
be unwise to think that epidemiological modelling is
sufficiently advanced to permit us to look ahead with
much confidence beyond a limit of five years into
the future. Other major problems are estimating the
quantitative effects of HIV on the domestic savings
rate, and on the loss of productivity per HIV
infection. What we called above the change in
effective labour supply. The model can be tested for
its sensitivity to both savings and productivity
variables, and Cuddington does carry out this analysis
to examine the sensitivity of the outcomes.
Figures 3 and 4 present Cuddington's
main results. Figure 3
for Gross Domestic Product (GDP) and Figure 4
for GDP per capita, for Tanzania over the period
1985-2010. The growth rate of real GDP declines from
an annual average without HIV of 3.8% to that of
2.8-3.2% with HIV. That is a reduction over the whole
period of between 19 and 36% depending on the savings
and productivity assumptions used. In the case of per capita
GDP the rates of growth range from 0.2 to 0.6% per annum
with HIV, compared with a no HIV situation of an
estimated 0.6%. The conclusion is that the economy
would undoubtedly grow more slowly in the presence of
HIV, with a 1% reduction of real GDP per annum,
but with a somewhat smaller impact on per capita
GDP growth as the reduction in output growth is partly
offset by slower population growth.
The second study is by Kambou, Devarajan and Over
[1991]. In some ways it is similar to that of
Cuddington in approach, but not in the modelling
process. In a relatively unsophisticated economy
(Cameroon), they have assumed that the affects of HIV
on the economy come through a reduction in the supply
of labour, and the consequences of this for wages and
prices. This approach allows the disaggregation of the
labour supply by skill and by urban and rural labour
distribution, which it is argued is important for
estimating the effects of HIV on the economy. The
study marshalls some of the evidence for Sub-Saharan
Africa that supports the proposition that HIV has a
skill and education gradient. That is, that the
epidemic is striking at those with the highest levels
of education and productive skills, namely those
embodying a substantial investment in human capital.
The researchers construct a model of the Cameroonian
economy to explain the performance of the main
economic aggregates over a recent period 1986-91 (the
base run). Then, they superimpose on this the effects
of an assumed level of HIV. The reference case is,
therefore, a benchmark against which to judge the
effects of HIV on the economy. The impact of HIV is
assumed to take the form of a reduction annually of
the labour supply, and the model is run with varying
proportions of skilled/unskilled and urban/rural
workers in the labour supply. Thereupon they present
their results for the main economic aggregates as
differences from the base run, i.e., no HIV case.
As might be predicted the worst effects on the economy's
performance come when HIV primarily affects the supply
of skilled urban workers:
"The impact on the economy is devastating: the growth
rates of saving and investment fall sharply, leading
to a steep decline in GDP growth rates. The decline in
real output growth is accompanied by a deterioration
of the competitiveness of the economy in international
markets, which is reflected in the falling growth
rates of exports, and a movement towards current
account problems".
GDP growth rates decline from an annual average in the base
run of 4.3% to 2.1% in the worst case, with
deterioration in both the government budget balance
and the external accounts. The study concludes,
"rather than the total number of AIDS cases, it
is the selective distribution of HIV infection that is
potentially devastating for economic growth in the
countries of Sub-Saharan Africa".
The third macro study to be reviewed is that of Myers et
al., [1991] on Thailand which is more traditional in
its approach to measuring the economic impact of HIV.
This is part of a group of studies that assumes that
the costs of HIV can be split into direct (mainly
health costs) and indirect (the output foregone by a
country due to AIDS mortality). The sum of these two
costs is then usually equated with the economic costs
of HIV, although the Myers study does identify some
other economic effects.
It confirms other studies which stress the virtual
impossibility of families meeting from their own
resources the health care costs of infected persons.
Even at levels of treatment that exclude the most
expensive therapies, the costs of health care would
absorb some 30-50% of average household income in
Thailand. Inevitably this will pose a major budgetary
burden for the Thai Government, if it chose to try and
meet it, and if it did so through traditional
institutional mechanisms. Much more significant are
the indirect costs, which are in the aggregate over
the whole period 1991-2000 put at between US$ 7.3 billion
and US$ 8.7 billion. The loss per AIDS death
represented by these indirect costs is estimated at
US$ 22 000, i.e., some 17.6 times the per capita
GDP in 1991. Not only are the estimated direct and
indirect costs very substantial, together they amount
to an annual cost of some 16-18 times per capita
GDP, but the study confirms that indirect costs to the
economy due to foregone output far exceeds the direct
costs due to health expenditures.
There is not much which needs to be said about the
conclusions drawn in these three examples of
macro-modelling of the impact of HIV. The impact can
be shown to be very significant for economic
performance, but the results do need to be considered
with a high degree of caution. It cannot be said that
econometric modelling, such as Cuddington and Kanbou
et al., has a good track record. Also, it should be
readily admitted that we know relatively little about
those structural relationships which are important for
estimating the impact of HIV on development. What has
been done so far has been fairly simplistic, and
should at best be viewed only as an indicator of the
potential scale of the impact of HIV on economic
performance. However, there is other evidence
suggesting that for high seroprevalence countries the
effects may be more severe than these studies
indicate. Thus confirming that we are dealing here
with issues of major economic significance. What
stands out from the Thailand study of Myers et al., is
how much larger are the costs to the economy from lost
output due to AIDS mortality. These costs vastly
exceed the direct costs of health care, and it is
these indirect costs broadly defined which are the
main source of the economic losses that are imposed on
countries by the HIV epidemic.
Sectoral Studies
Research at the sectoral level is more likely to be useful
in informing policy than macro-modeling, and if
resources are to be expended then sector impact
studies are more likely to be productive. So far much
of the work has been on Africa. Very little of it has
been about the actual sectoral and industrial impact
of HIV as opposed to its probable impact, given the
structural characteristics of production. This is
unsurprising since the impact of the epidemic at this
level of aggregation has yet to be felt, except in one
or two specific cases.
Typical studies in this area examine the effect of labour
supply changes on farm systems and on particular types
of crops. The dependence of production on labour
inputs in general, and on peak labour needs in
particular, are identified for categories of
producers, differentiated by size and types of
products. Such categorization might also include
whether producers are male or female headed
households, the degree to which they use hired labour,
and for what purposes. What in effect is being
measured by such studies is the vulnerability of farm
systems to HIV morbidity and mortality, and implicitly
the vulnerability of different types of producing
units. The latter may display stress much earlier than
the system, since some producers will be more marginal
and vulnerable than others to changes in the labour
supply.
For many developing countries, with relatively elementary
economic structures, the consequences for food output
and for cash crops are of fundamental importance.
Policy makers need to be informed in advance where the
stress points lie, and what can be done to relieve
these through policy interventions.
There are a number of studies of the impact on farm systems
to which reference can usefully be made. Barnett and
Blaikie [1990, 1992] looked at the vulnerability of
Ugandan farm systems under various criteria. They
found that of a total of 50 systems, 9 were vulnerable
to shortages of labour and existing shortages of
protein and energy; and 17 were vulnerable on the
criterion of existing or potential shortages of labour
or of protein and energy deficiencies. They also
observed: "vulnerable households within each
farming system may show signs of stress long before
the farming system as a whole does ... poorer
households may well be seriously affected by lower
incidence of the disease." [1990]. Table 1
is a useful taxonomy of the various coping strategies
identified by Barnett and Blaikie, at the level of the
homestead, farm and market. It succinctly summarizes
some of the alternative strategies that may be
available at each level of organization. Accordingly,
it is worthwhile for the reader to consider some of
these alternatives in more detail, in part because
they illustrate the complexity of possible impacts and
responses. What is brought out is the need for some
kind of dynamic analysis that captures behaviourial
responses.
Unfortunately it is too easy to take a static picture of
the situation: to start with the present non-HIV case
and to superimpose on it an assumed change in labour
supply as if this was the end of the story. Certain
farm impact case studies do precisely this, and as a
consequence are less than acceptable as analyses of
the vulnerability of farming structures. Economic
systems are not static, but are characterized by
behaviourial responses to all the changing phenomena
that affect decisions. HIV will have, is having
already, multiple effects, and is generating responses
that need to be considered if there is to be
understanding of the economic impact.
There is a need to model farming systems in ways that
reflect their complex social and economic
relationships, and to move the analysis and estimation
beyond the boundaries usually set by farm management
studies. In particular studies need to recognize the
existence of rural labour markets, which actually
behave in ways different from those assumed by most
economists. Yet these markets will be crucial in
meeting the constraints placed on production by
declines in labour supplies. Sender and Smith's [1990]
study of Tanzanian rural labour markets demonstrates
the importance of these markets, and the complexity of
the analysis required to make sense of their
operation.
Of particular importance are likely changes in key prices
in the economic system in the face of changing demands
and supplies. These include changes in the absolute
and relative prices of commodities, in particular food
and services such as transport, as well as changes in
wages and interest rates. Consequently, certain key
economic parameters will be altered in response to the
changing availabilities of labour and of savings. This
in turn will set in motion behaviourial responses,
thereby causing revision of decisions about resource
allocations of the kinds identified in Table 1.
The imperative for researchers should be to undertake
analysis of the impact of HIV on factor prices,
interest rates and wages, especially the latter,
within frameworks which are realistic. In this respect
the research of Sender and Smith [1990] on rural
Tanzania, and of Vandemoortele [1991] on African
urban labour markets, point the way for those intent
on useful applied research on HIV.
An interesting study is that by Norse [1991] which
looked at both food and cash production by Malawian
smallholders. From farm management data it is possible
to estimate for typical producers of maize, cassava,
ground nuts, tobacco, cotton etc., differentiated by
size of holding, what the impact will be of changes in
labour supply and of cash remittances. This latter
variable is important in Malawi, and other countries,
where members of the household, usually the male head,
have migrated to urban centres, including
international destinations.
Dependence on remittances for survival in many rural
communities opens up a further element of
vulnerability. Norse found that female headed
households were especially vulnerable to changes in
labour supply and to reductions in the flow of
remittances, and that certain cash crops, tobacco and
cotton, were particularly vulnerable to changes in the
availability of labour. It needs to be noted that
Norse was looking at smallholder production. He did
not consider the large commercial estate producers
who, while they account for a small proportion of the
total number of producers, do account for most of the
exported cash crop production. What their responses
will be to labour shortages was not explored, but that
they would have to adjust to deteriorating labour
supply conditions goes without saying. What is
important for estates, as it will be for many
smallholders who use hired labour, will be what
happens to wages under conditions of falling labour
supplies. Hence, what will be the impact on overall
costs?
All industries will be affected by the HIV epidemic,
directly through their labour supply, and indirectly
through re-allocations of demand, as consumers
allocate more of their income to health expenditures.
It is obvious that some industries are exceptionally
vulnerable to the effects of HIV. A case of this is
the Zambian copper industry. It accounts for virtually
the whole of the export earnings of the country (90%),
and for about 25% of GDP. Seropositivity is already
high, and it is predicted that by the end of the 1990s
some 60% of the labour force will be HIV-positive
[Desmond, 1989]. Much of this labour is skilled,
and reflects a major investment on the part of the
State and individuals. This poses immense problems
with respect to skilled labour replacement for a poor
and resource-scarce country.
Countries dependent on tourism for employment and foreign
exchange are also extremely vulnerable from:
- the
erosion of their labour supplies;
- a
re-ordering of domestic demand priorities as
incomes are constrained by HIV;
- demand
shifts as foreign tourists seek out what they
consider to be less risky destinations.
Cases in point here are Kenya and Thailand, where the
evidence suggests that delay in establishing policies
for HIV prevention clearly owed much to concern that
tourists might go elsewhere. An understandable
decision given their dependence on the foreign
exchange earnings of this sector. In the case of
Thailand accounting for net foreign exchange earnings
of some 10% of total foreign exchange received from
all sources. This delay, as Section 2 above makes
clear, was a most unfortunate decision. It has been
instrumental, in part, for the rapidity of the spread
of HIV in both these countries. Both countries have
been more open recently about their HIV situation
without any obvious impact on tourism.
While it must be assumed that the sex entertainment
industry of Thailand is now vulnerable to shifts in
international demand, it should be noted that much of
the demand for the services of commercial sex workers
(CSWs) is in fact internally generated. There is a
complex intra-industry relationship between internal
and external demand, and it is by no means a simple
matter to predict what the effects of shifts in the
composition of demand would be on this industry. It is
not obvious yet that demand, internal or external, has
been affected by increasing information about the
risks of HIV, although there must be a point at which
it is. Indeed the Thai government, which recently has
been more open about the level of HIV, will have to do
much more to restrain demand, from whatever source. To
date, there is little evidence that activities
undertaken to change the conditions under which the
CSW industry functions are having much of the desired
effect. The way forward in terms of protecting
employment and the contribution to GNP and to foreign
exchange of tourism in the case of Thailand is
obvious: it is to shift the pattern of foreign tourist
demand. Even if this was achieved as an objective, the
crucially important domestically generated factors
which spread HIV would remain, and the core of the
economic and social problems caused by HIV would be
more or less unchanged.
One sector that plays a crucial role in the integration of
national markets for labour as well as for commodity
and service production is transport. This sector also
seems to play an important role in the spread of HIV.
Various studies have looked at the role of truck
drivers, both in Africa and in Asia, in the spread of
HIV. It has long been observed that HIV seems to
cluster in the main transport hubs of a country: major
ports, communities that are important truck stops, and
along main highways. Our interest here is in the
consequences of infection for the transport sector's
performance, and the implications of high infection
rates amongst employees of transport enterprises for
the general performance of the economy.
This turns out to be a complex matter, and there is only
one study in detail on these matters and it is for
Thailand's trucking industry [Giraud, 1992]. This
study suggests that for firms and government the
build-up of costs caused by HIV, through the impact on
social programmes, become very significant within 10 years.
There are, of course, implications for other sectors
of the economy as cost increases feed through into
user charges that impose an additional burden on the
economy. Giraud's study is pathbreaking. It is the
only example of the detailed estimation of the effects
of HIV on a productive sector of this type in a
developing country. It represents the kind of research
that is sorely needed in other countries.
It would be possible to go through a catalogue of
industries, but this is probably unnecessary. However,
it may be worthwhile making reference to Financial
Services, since this sector will also be affected by
HIV. It, too, will be faced by changing conditions of
labour supply, and it will be affected by changing
levels of income that reduce savings. In addition,
there will be industry specific effects. Insurance
companies are, in some countries, requiring HIV
testing prior to writing life and mortgage indemnity
policies. In some cases annual testing is required for
a minimum period where seronegativity has to be
satisfied. Obviously conditions relating to mortgage
repayment are changed by HIV. In Kenya, for example,
an HIV test is now sometimes required before an
advance is made. Where positivity is found only a
smaller advance is forthcoming. In the case of health
insurance, but also in the case of social security
systems generally, there are major problems caused by
HIV that have to be addressed. In the case of social
security this is mainly a problem for government, but
not entirely, given the existence of private pension
and health insurance arrangements in some countries.
The catalogue of impacts here are many, and a multitude of
financial institutions are affected and will need to
respond. I know of no particular studies which have
addressed these issues in developing countries,
although there are isolated examples of institutions
changing their policies in the face of HIV. These are
areas where government has particular interests so as
to ensure that institutions in their actions are fair,
reasonable, and consistent with the national HIV
strategy. There are obviously fundamental questions
here about the continuing financial viability of
institutions, both private and public, which need to
be addressed. Not least are issues to do with lending,
and how "prudent" lending criteria are
changed in a world of HIV. Changes in banking
practices have to be managed so as to serve multiple
interests and not simply reflect those of conservative
finance. What are needed are innovations in lending
behaviour that help contain the adverse economic and
social impacts of the epidemic.
Impacts on Households
Because there is a wider range of literature on the impact
of HIV on households, particularly for some African
countries, this Section will be brief. The material is
well reviewed by Devereux and Eele [1991], who
make interesting use of studies on the impact of
famine and other illnesses, such as river blindness,
to predict how households and communities might cope
with HIV. The costs for a family of a prolonged
illness include additional expenditures particularly
on health, lost income, and re-allocation of work and
domestic responsibilities. It is inevitably the case
that some households will be more able to meet these
costs than others. As one would expect, those with
fewest assets are the most vulnerable. There is
evidence that poor households incur debt in order to
meet additional health costs. That they try, as far as
possible, to hold on to productive assets, such as
land, trees, for as long as possible to protect the
continued existence of the family. Death itself
imposes additional economic costs, which in many
societies further drain the resources available to
households.
Such costs are, of course, only a fraction of those that
individuals and families have to bear. The other
costs, of trauma and grief, are rarely included in
evaluations. Secondary costs are also inevitable:
- reduced
access to education;
- reduced
future income streams;
- losses
of capacity for domestic work within households;
- reduced
capacity for the care of dependents, both the
young and the elderly; and
- the
possibility of structural changes within
households, that is, the dissolution of families.
The evidence from many countries in Africa is that many
families and communities are coping with the economic
and other costs of HIV, but that policy interventions
are needed now to assist the most vulnerable.
What is clear is that both the personal and social costs of
HIV will be pervasive and substantial. For countries
that are unable to contain the spread of HIV, which
may be most of the developing world, the costs will be
quantitatively large and they will persist for many
years into the future. In this sense the HIV epidemic
is unlike a famine or some other kind of reversible
shock to the economic and social structure.
Consequently, the coping strategies may have to be
quite different in the face of cumulative distress.
These adverse impacts are being felt in many countries, and
will be felt in many others before the end of this
decade. The countries bearing the brunt of these costs
are, for the most part, those where economic
performance over the past 20 years has been
sluggish, and where standards of living are extremely
low. In many of these countries the performance of the
public sector has been poor. In addition, there are
current programmes that will further erode the
capacity of the State to manage and deliver services.
None of this is news, unfortunate though it is. But
recognition of the reality in numerous developing
countries is critical for understanding what is
possible, what policies are feasible, and where the
burden of response must lie. There is much that the
State can and ought to do in HIV prevention, in
improving care, and in meeting the challenges posed by
HIV to the performance of the economic system. But, in
the deeply complex areas of behaviour change and in
managing the social, economic and psychological
impacts of the epidemic, there is no alternative to
interventions and support systems that are focused on
households and communities. Much follows from
recognizing this conclusion, not the least of which is
that in severely resource limited countries the State
could not meet these costs of the HIV epidemic even if
it wanted to. Thus, most policy interventions will
have to focus on households and communities as the
effective intervention points in the social and
economic structure. Institutions will need to be
supported and/or created whose activities take place
at these levels.
CONCLUSIONS
Conclusions can be stated very briefly and, indeed, simply
listing these will perhaps provide greater emphasis.
- The
economic and social costs of HIV are truly
colossal. The epidemic, if unchecked, could
transform the developmental performance of many
countries. Not simply in terms of national
economic growth rates, but also in terms of those
broader social indicators that more accurately
reflect improvements in the standard of living. No
sectors of the economy are immune to the impacts
of the epidemic, and all social strata will be
affected.
- Low
prevalence countries are in a position to act now
with effective policies to prevent the spread of
HIV, and thus avoid its economic, social and
psychological costs. Section 2 of this paper
makes it clear why it is crucial to act now, and
not to wait until a point where these costs become
unavoidable. The returns from effective HIV
prevention activities in all countries, with high
or low seroprevalence, will in most cases
substantially exceed those from other investments.
- Major
shifts in attitudes and policies are required if
effective policies for prevention are to be
implemented, and there can be no place here for
delicate sensibilities. This means grappling with
sensitive issues of sexuality and gender
relationships, where major and fundamental changes
are required. Such changes will be extremely
difficult to bring about, but there are no
alternatives.
- There
are obvious limits to what governments can achieve
in this area, but they can be expected to provide
resources and leadership. However, effective
action will often depend on non-governmental
organizations and community based organizations.
They can reach those engaging in high risk
behaviours, and provide for those infected and
affected by HIV. In most developing countries, if
not all, the resource costs of caring for the
infected and the affected will inevitably have to
be borne more or less entirely by households and
communities.
- There
is much that the social sciences can offer in
analysis, interpretation of data and policy
formulation and its evaluation. This is most
obvious in seeking to understand the economic and
social factors that induce risky behaviours, such
as the role of poverty in forcing women in many
countries into prostitution as their only means of
survival. Economists must be involved in the
development of HIV policy interventions, so that
their relative effectiveness is fully understood.
For those persons infected with HIV the object of
policy has to be full integration and
non-discrimination, so that they can live
constructively within the society. It would take
little by way of public expenditure to enable
those infected with HIV to make a full economic
and social contribution for many years.
- The
challenges posed by HIV for the economies of the
developing countries are easier to identify in
theory than to measure quantitatively. Much
applied work needs to be done to fill in the huge
gaps in understanding, and to identify the scale
and scope for policy response. But research to be
useful must be founded on insight into how
economic and social structures function and
interact in practice, and not on some assumed
theoretical constructs. The issues are too
serious; the problems to be surmounted too
critical, to be left either to markets or to
uninformed doctrine. Much of this applied research
to be useful for policy will need to be national
in focus and in its performance.
Table 1.:
AIDS Coping and Caring Strategies in Rural Uganda
The Homestead
Change in household structure:
amalgamation (same generation)
splitting
additional dependent members (young orphans)
additional dependent members (older orphans)
Changes in domestic work organization:
increase time spent
decrease time spent
alter work distribution among household members (may
affect women)
Change in level of life/welfare of household members:
poorer diet (restricted range of food, less preparation
time)
poorer housing (less time for repairs)
less access to education (particularly girls)
The Farm
Changes in farm work organization:
increase time spent on farm
decrease time spent on farm
hire labour
substitute other inputs for labour
Changes in farm practice:
decrease crop range
cut out cash crops
cut out some food crops
adopt intercropping
The Market
Changes in cash income earning:
loss of remittances
loss of cash income because of need to use time for
domestic/farm work
sale of food crops
sale of handicrafts
other petty trade
sale of household labour
Source: Barnett and Blaikie (1990: xiii-xiv)
BIBLIOGRAPHY
Barnett T. and Blaikie P., Community Coping Mechanisms
in the Face of Exceptional Demographic Change: Final
Report to the Overseas Development Administration,
London, July 1990.
Barnett T. and Blaikie P., AIDS in Africa: Its Present
and Future Impact, Belhaven Press, London, 1992.
Bloom D.E. and Lyons, J.V. (eds.), Economic Implications
of AIDS in Asia, Regional Bureau for Asia and the
Pacific, UNDP, 1993.
Cuddington J., "Modelling the Macroeconomic Effects of
the AIDS Epidemic in Africa", draft mimeo,
Georgetown University, Washington D.C., June 1991.
Desmond G.M., "The Impact of AIDS on Economic
Development: An Approach to a Case
Study in Africa", mimeo, October 1989.
Devereux S. and Eele G., Monitoring the Social and
Economic Impact of AIDS in East and Central Africa,
Food Studies Group, Oxford University, Report
Commissioned for UNDP, September 1991.
Giraud P., "The Economic Impact of HIV/AIDS on
the Transport Sector: Development of an Assessment
Methodology", mimeo, UNDP, 1992. Published in
Bloom and Lyons, 1993.
Kambou G., Devarajan S., and Over M., "The
Economic Impact of the AIDS Crisis in Sub-Saharan
Africa: Simulations with a Computable General
Equilibrium Model," Journal of African
Economies, Vol. 1, No. 1., 1992.
Myers C., Obremskey S.A., and Mechai Viravaidya,
"The Economic Impact of AIDS on Thailand",
mimeo, October 1991. Published in Bloom and
Lyons, 1993.
Norse D., "The Potential Impact of AIDS on
Agricultural Production", mimeo, FAO,1991.
Sender J. and Smith S., Poverty Class and Gender
in Rural Africa; A Tanzanian Case Study, Routledge,
London, 1990.
Vandemoortele J., The Sub-Saharan Labour Market,
mimeo, UNDP, February 1991.
World Bank, Tanzania AIDS Assessment and Planning
Study, Washington, D.C., August 1991.
BIOGRAPHICAL NOTE
Des Cohen is the Director, HIV and Development Programme,
United Nations Development Programme (UNDP), New York.
He is an economist with university teaching experience
in Africa, Canada, the UK and the USA. Formerly he was
a Governor and Associate Fellow at the Institute of
Development Studies, University of Sussex in the
United Kingdom and until 1990, he was Dean of the
School of Social Sciences. He has both research and
applied macro-economic policy experience in a number
of African and Asian countries. Previously he was an
adviser to the British Treasury on international
financial policy.
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