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AIDS Hits Investment, Stalls Economic Growth

December 2000

It remains exceptionally difficult to gauge the macroeconomic impact of the epidemic. Many factors apart from AIDS affect economic performance and complicate the task of economic forecasting -- drought, internal and external conflict, corruption, economic mismanagement. Moreover, economies tend to react more dramatically to economic restructuring measures, a sudden fuel shortage, or an unexpected change of government, than to long, slow corrosions such as those wrought by AIDS.

Despite incomplete data, there is growing evidence that as HIV prevalence rates rise, both total and growth in national income -- gross domestic product, or GDP -- fall significantly. African countries where less than 5% of the adult population is infected will experience a modest impact on GDP growth rate. As the HIV prevalence rate rises to 20% or more (as it already has in a number of countries in southern Africa), GDP growth may decline up to 2% a year.

With adult prevalence rates of around 20% and 36% respectively, South Africa and Botswana are already feeling the impact of the epidemic. Worse is yet to come: in both countries, today's 15-year-olds have a greater than 50% chance of dying of HIV-related causes if current infection rates are not cut dramatically. Recent studies carried out or commissioned by these countries shed new light on the macro-economic impact that is likely to result from illness and death of this magnitude.

Studies yield a somewhat bleak picture in South Africa, where per capita income is six times the average for sub-Saharan Africa and the national economy accounts for 40% of the region's total economic output. According to a comprehensive study by ING Barings Bank, the overall economic growth rate over the next decade is likely to be 0.3 to 0.4 percentage points lower every year than it would have been without AIDS. Cumulating the slower economic growth over time, a further study finds that by 2010, the real gross domestic product (GDP) will be 17% lower than it would have been in the absence of AIDS. In today's terms, that would wipe US$ 22 billion off South Africa's economy -- more than twice the entire national production of any other country in the region except Nigeria.

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The latter study also projects that, by the start of the next decade, households will be spending far more on care for AIDS patients and orphans and, on average, will have 13% less disposable income per person. Investment will suffer as families -- but also companies and the government -- divert to health care expenditure the money that would otherwise have been saved and reinvested in the economy. On the other side of the investment equation, there may be an incentive to eliminate some HIV-related costs by replacing human beings -- especially those without special skills -- with equipment and machinery. In the case of South Africa, it is not clear to what extent this will happen. While HIV infection rates are highest among this section of the workforce, so are the unemployment rates -- the latter stand at around 30%. Thus, unskilled workers dying of AIDS may simply be replaced by others who are not currently employed. At the same time, AIDS is likely to exacerbate the severe shortage of qualified men and women in most sectors of the economy, creating major bottle-necks in business and production. This is especially worrying since HIV is also undermining education (see AIDS and Education: Complex Links) and hence the potential to expand skills as quickly as they are needed.

The skills shortage is even more acute in neighbouring Botswana, which is already importing white-collar workers. One recent study predicts that wages among skilled workers will be pushed up by between 12% and 17% because of AIDS deaths. Dominated by the diamond mining industry, the country's economy is much more capital-intensive than most African economies. The ratio of capital to production is expected to rise by 18% over the next 25 years, helping the diamond industry to stay afloat and keeping investment levels healthy. Even under these conditions, Botswana's unskilled labour market will grow tighter, with unemployment among the unskilled falling by 8%, and production will decline in the diamond industry and other sectors. With around 1.5% sliced off the GDP growth rate every year, by 2025 the economy will be a dramatic 31% smaller than it would otherwise have been.

Even more striking in Botswana, however, is that AIDS will alter the distribution of the remaining income. At US $3,240, Botswana has the highest per capita GDP in sub-Saharan Africa. By investing its diamond income wisely, the country has achieved high levels of literacy, good coverage of basic health services, and a reduction in the number of poor households. These gains will be eroded by the epidemic. A study of the effects of AIDS suggests that the number of destitute households (those earning less than US$ 5 per person per month) will rise over the next 10 years. Over the same period, the poorest households will experience a 13% drop in income and expand in size, as wage earners take on extra dependants because of AIDS.

Government budgets in Botswana will be affected, too. Spending on health is likely to rise dramatically, by some estimates more than tripling over the next 10 years. Some savings may be incurred in education, as HIV in young adults seriously dents the number of children born and reaching school age. But the cost of training teachers in numbers great enough to compensate for AIDS-related mortality will undermine these savings. Providing social support to families in greatest need will also weigh on government budgets. All this extra spending comes on top of a shrinking tax base, the result of an economy a third smaller than it would otherwise have been. Overall, AIDS is likely to shrink the government budget in Botswana by more than 20% over the next 10 years.

These economic projections for both South Africa and Botswana assume that prevention programmes will not bring about any drastic changes in HIV infection rates in the immediate future. Since a large proportion of the people projected to sicken and die over the next 10-15 years are already infected, this assumption seems reasonable. If massive mobilization in southern Africa manages to bring about a fall in HIV infection among young people similar to that seen in Uganda -- a prime aim of the International Partnership against AIDS in Africa (see Panel 5) -- then the longer-term scenarios described here may overestimate the impact of AIDS at a macroeconomic level.



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This article was provided by UNAIDS. It is a part of the publication AIDS Epidemic Update: December 2000. Visit UNAIDS' website to find out more about their activities, publications and services.
 
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