Optimism on the impact of Aids on South Africa would be ”unconscionable”, according to the three authors of a World Bank study on the impact of Aids in the country.
In their report — The Long-run Economic Costs of Aids: Theory and an Application to South Africa — Clive Bell, Shantayanan Devarajan and Hans Gersbach state that South Africa could face progressive economic collapse within several generations unless it combats its Aids epidemic more urgently.
The South African National Treasury disagreed with this assessment and said several other studies, including earlier World Bank reports, show a far milder impact.
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% 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.
The authors 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; for the children of Aids victims will be left without one or both parents to love, raise and educate them,” the authors state.
To analyse this problem, they developed 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 analysed: ‘nuclear’ and ‘pooling’, where under the latter all children are cared for within an extended family.
The decision about how much to invest in education, said the report, is influenced by premature adult mortality in two ways: first, the family’s lifetime income depends on the adults’ health status, and second, the expected pay-off depends on the level of premature mortality among the children when they attain adulthood.
Furthermore, if one or both parents die while their offspring are still children, the transmission of knowledge across generations is weakened. 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, asid the report, 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; and taxes to finance these expenditures.
When calibrated for South Africa, 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.
If nothing is done to combat the Aids 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.
The central conclusions of the paper are; first, that the Aids epidemic will peak far in advance of the economic damage it will ultimately cause, and second, the scale of that damage — in terms of accumulated losses in GDP per capita — will also be large. This applies even if the measures designed to combat the disease and to ensure the education of half and full orphans are well chosen and the fiscal means employed to finance them are highly efficient.
In the absence of such measures, an economic collapse is on the cards. – I-Net Bridge