The Long-Run Economic Costs of Aids: Theory and an Application to South Africa

116 Pages Posted: 20 Apr 2016

See all articles by Clive Bell

Clive Bell

University of Heidelberg - South Asia Institute (SAI)

Shantayanan Devarajan

World Bank Middle East and North Africa Region

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: October 2003

Abstract

Most existing estimates of the macroeconomic costs of AIDS, as measured by the reduction in the growth rate of gross domestic product, are modest. For Africa - the continent where the epidemic has hit the hardest - they range between 0.3 and 1.5 percent annually. The reason is that 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. Bell, Devarajan, and Gersbach argue 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. The children of AIDS victims will be left without one or both parents to love, raise, and educate them.

The model yields the following results. In the absence of AIDS, the counterfactual benchmark, there is modest growth, with universal and complete education attained within three generations. But if nothing is done to combat the epidemic, 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.

This paper - a product of the Office of the Vice President, Human Development Network - is part of a larger effort in the network to evaluate the economic consequences of HIV/AIDS.

Suggested Citation

Bell, Clive and Devarajan, Shantayanan and Gersbach, Hans, The Long-Run Economic Costs of Aids: Theory and an Application to South Africa (October 2003). World Bank Policy Research Working Paper No. 3152. Available at SSRN: https://ssrn.com/abstract=636571

Clive Bell

University of Heidelberg - South Asia Institute (SAI) ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

Shantayanan Devarajan

World Bank Middle East and North Africa Region ( email )

1818 H Street, NW
Washington, DC 20433
United States

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland
+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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