economic impact of hiv/aids in sub-saharan africa

THE ECONOMIC IMPACT OF HIV/AIDS IN SUB-SAHARAN AFRICA

Summary

1. There are roughly 40 million people world-wide infected with HIV; sub-Saharan Africa accounts for around 25 million of these. A disproportionately high three-quarters of global deaths from AIDS in 2006 were in Sub-Saharan Africa.

2. The HIV/AIDS epidemic is a major threat to Africa’s economic development. The impact is widespread, affecting individuals, households, firms and governments. The epidemic will harm prospects for African economic growth in both the near and long term. Most importantly, the impact on growth and the economy in turn “feed back” and foster the spread of HIV infection.

3. It is estimated that HIV/AIDS is already reducing sub-Saharan annual GDP growth by between 0.8 and 1.4 percentage points. Countries with prevalence of over 20 per cent may suffer a reduction of up to 2.6 points annually. For a typical sub-Saharan economy this means that after two decades GDP could be less than two-thirds of what it would have been without HIV/AIDS. It has been argued that, without mitigation, this will make it impossible for Africa to achieve the Millennium Development Goals.

Background

4. Sub-Saharan Africa is home to around 26 million people living with HIV. In 2005 it is estimated that 3.2m became newly infected with HIV, while 2.4m died of AIDS.

5. There are large variations in HIV/AIDS prevalence across the region. Southern Africa remains the epicentre of the epidemic; over 30 per cent of people infected with HIV world-wide are here. Prevalence has stabilised in a number of Southern and Sub-Saharan African countries, although it remains at very high levels and only in Kenya, Uganda and Zimbabwe does the epidemic appear to be declining.

6. The rate of HIV infection over the past two decades has been described as the first wave of the epidemic. The extent of this wave determines the size of the next one: deaths from AIDS. These combine to bring about a third wave: the widespread social, economic and political impact of HIV/AIDS, felt by infected and non- infected alike.

Current growth

7. HIV/AIDS has the potential for a devastating impact on economic growth because of its impact on the labour market. Illness and mortality from HIV/AIDS reduce the overall supply of effective labour. The composition of the labour force also changes, as young people, especially young women, who should be in their most productive years are more at risk of HIV infection than other demographic groups.

8. HIV/AIDS reduces households’ income. Studies in Tanzania have shown that when a household contains an AIDS patient, the household labour supply falls by up to 43 per cent. A chronically ill member is estimated to reduce average household annual income across Southern Africa by up to 35 per cent; the figure resulting from an adult death is even higher. Declining income is, in addition, stretched by the cost of health care and funerals, expenditure on which have been found to take up almost half of household income in Zimbabwe.

9. Agriculture is the largest sector in most African economies, making up the majority of employment, but it is coming under increasing pressure from the HIV/AIDS epidemic. If just a few workers are lost at crucial times of the year then this can have a disproportionate effect on harvests and income. In Zimbabwe for instance it is estimated that an adult death from AIDS shrinks household production of maize, the local staple, by over 60 per cent.

10. Firms may also be significantly affected by HIV/AIDS. In South Africa, a third of companies told the South African Business Coalition that HIV/AIDS has had a negative impact on profits. In general, this is due to the effect HIV/AIDS has in both raising costs and reducing revenues. Production, and hence revenue, falls with a decline in workers’ productivity, due to illness and absenteeism. Studies have shown that firms’ costs also rise significantly; in Uganda and Botswana the annual cost of AIDS for each employee, in the form of health care, training and insurance, is as much as $300. Annual spending on all health care in Uganda averages around $20 per capita; in the UK it is about $1,600.

11. Governments’ budget balances are likely to deteriorate as health sector costs rise with the number of AIDS patients, who are more expensive to treat than those with other conditions, and the tax base shrinks. Health expenditure is projected to increase, although services are increasingly stretched; in many African hospitals AIDS patients occupy more than half of the beds. Indeed, there is limited evidence of the ability for increased expenditure to meet increased demand for health services. Governments therefore face a number of trade-offs in their allocation of spending: between AIDS treatment and HIV prevention measures, between AIDS and other illnesses and indeed between spending on health and other sectors.

12. Incorporating the effects of HIV/AIDS on households, firms and governments into estimates of the immediate macroeconomic impact is a difficult task. Over time, economists have been able to expand their models to include a greater range of costs from HIV/AIDS and predictions for short-term growth have, as a result, become increasingly gloomy. The World Bank in 1992 estimated that across 30 sub-Saharan economies AIDS reduces GDP growth by between 0.8 and 1.4 percentage points a year. Studies in 2000 found that South Africa is expected to lose 1.6 percentage points of GDP growth a year, while Botswana may lose up to 4.4 percentage points annually.

Long run growth potential

13. HIV/AIDS also hampers long-term growth prospects. The level of savings is an important determinant of the potential for an economy to expand over time, as households’ savings finance business’ investment. Investment allows for the accumulation of capital, such as machines, or computers, which in turn allows firms to expand production and raise national income. However, HIV/AIDS leads savings to fall dramatically, through both a reduction of households’ income and the additional strains placed on expenditure by rising health costs. A study in Cote d’Ivoire showed that amongst urban households with an AIDS patient, expenditure was a third higher than income, meaning savings were negative. This is typical of many sub-Saharan economies. A savings deficiency therefore hampers the opportunity for investment, preventing the economy from expanding.

14. Another important determinant of long run growth in an economy is how well capital and other resources are used, i.e. the level of productivity in the economy. Productivity growth allows production of more output from a certain level of inputs, increasing the level of income that can be received from these inputs. This is influenced firstly by workers’ productivity, which is likely to decline sharply as a result of HIV/AIDS, as young workers, who should be in their most productive years, are most at risk from the epidemic. As life expectancy for young workers falls, so too does the incentive to undertake education and training, further reducing labour productivity. This will contribute to a decline in economy-wide productivity, which is likely to be exacerbated by the fall in investment outlined above.

15. Due to the impact of HIV/AIDS on the determinants of long run growth, the effects of HIV/AIDS on the macro-economy are expected to increase significantly over time. Consequently, economists’ predictions of the loss to GDP have been increasingly bleak. A 2001 IMF report in Botswana concluded that in the decade to 2010, almost a third of GDP would be lost as a result of AIDS. Previous studies in Malawi and Tanzania have shown that over two decades a quarter of GDP would be lost to AIDS. Furthermore, a recent World Bank analysis of the long-term impact in South Africa argued that, due to the damage to human capital as knowledge and skills decline, the key impact of HIV/AIDS would not be seen even in the next 10 to 15 years.

16. Perhaps the most important point to note is that the causality between HIV/AIDS prevalence and macroeconomic devastation works both ways. Just as HIV/AIDS places severe strain on the functioning of the economy, the economic impact fosters an environment in which the epidemic proliferates. The loss of households’ production and income as a result of AIDS morbidity and mortality, especially amongst young people, in turn means that surviving children and young adults are less likely to be educated or well-nourished. This makes them more susceptible to the risk behaviours that spread HIV. Sub-Saharan Africa potentially faces a vicious cycle of economic slowdown, poverty and the spread of HIV/AIDS.

Conclusions

17. The New Partnership for African Development (NEPAD) and the Millennium Development Goals set out clear targets for Africa’s development. NEPAD aims for 7 per cent average annual growth across the continent, while the MDGs hope to reduce poverty by half and eliminate hunger by 2015. Both are unlikely given the potentially destructive consequences of HIV/AIDS for Africa’s economy.

18. Urgent action is therefore needed to prevent Africa’s descent into the vicious cycle of HIV/AIDS. As political will and funding increase, it is especially important that the FCO is aware of the economic impact of HIV/AIDS and that we provide greater support for DFID and HMG in tackling the epidemic, efforts which will help to raise the life expectancy and living standards of millions across the African continent.

Appendix 1: Selected growth predictions for sub-Saharan economies affected by HIV/AIDS.

Date of study
Country
HIV prevalence %
Period of Projection
Overall loss to GDP (per cent)
Annual loss to GDP (percentage points)
1993
Tanzania
7
1985-2010
15-25
0.8-1.4
1993
Malawi
14.1
1995-2010
15-25
0.2-0.3
1996
Kenya
6.1
1996-2005
14
1.5
2000
South Africa
20
1998-2010
17
1.6
2001
Botswana
24.1
1999-2010
32
3.3-4.4

Appendix 2: Sub-Saharan Countries with more than 100,000 people living with HIV

Country
People living with HIV/AIDS
Adult (15-49) rate %
Women with HIV/AIDS
Children with HIV/AIDS
AIDS deaths
Angola
320,000
3.7
170,000
35,000
30,000
Botswana
270,000
24.1
140,000
14,000
120,000
Burkina Faso
150,000
2.0
80,000
17,000
12,000
Burundi
150,000
3.3
79,000
20,000
13,000
Cameroon
510,000
5.4
290,000
43,000
46,000
Central African Republic
250,000
10.7
130,000
24,000
24,000
Chad
180,000
3.5
90,000
16,000
11,000
Congo
120,000
5.3
61,000
15,000
11,000
Cote d’Ivoire
750,000
7.1
400,000
74,000
65,000
DR Congo
1,000,000
3.2
520,000
120,000
90,000
Ethiopia
420,000-1,300,000
0.9-3.5
190,000-733,000
30,000-200,000
38,000-130,000
Ghana
320,000
2.3
180,000
25,000
29,000
Kenya
1,300,000
6.1
740,000
150,000
140,000
Lesotho
270,000
23.2
150,000
18,000
23,000
Malawi
940,000
14.1
500,000
91,000
78,000
Mali
160,000
1.7
66,000
16,000
11,000
Mozambique
1,800,000
16.1
960,000
140,000
140,000
Namibia
230,000
19.6
130,000
17,000
17,000
Nigeria
2,900,000
3.9
1,600,000
240,000
220,000
Rwanda
190,000
3.1
91,000
27,000
21,000
South Africa
5,500,000
18.8
3,100,000
240,000
320,000
Swaziland
220,000
33.4
120,000
15,000
16,000
Uganda
1,000,000
6.7
520,000
110,000
91,000
Tanzania
1,400,000
6.5
710,000
110,000
140,000
Zambia
1,100,000
17.0
570,000
130,000
98,000
Zimbabwe
1,700,000
20.1
890,000
160,000
180,000

References

1. UNAIDS/World Health Organisation, 2006. AIDS Epidemic Update: December 2006. http://data.unaids.org/pub/EpiReport/2006/2006_EpiUpdate_en.pdf
2. Over, Mead, 1992. The Macroeconomic Impact of AIDS in sub-Saharan Africa. World Bank Technical Working Paper.
3. Bonnel, R 2000. HIV/AIDS and Economic Growth: A Global Perspective. South African Journal of Economics 68.5 pp820-50
4. Royal African Society and Africa All Parliamentary Group, 2004. Averting Catastrophe: AIDS in 21st Century Africa. http://www.royalafricansociety.org/documents/averting_catastrophe21.pdf
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7. Arndt, C. and J. Lewis, 2000. The Macro Implications of HIV/AIDS in South Africa, A Preliminary Assessment, World Bank Working Papers.
8. MacFarlan, M. and S. Sgherri, 2001. The Macroeconomic Impact of HIV/AIDS in Botswana, IMF Working Papers. http://www.imf.org/external/pubs/ft/wp/2001/wp0180.pdf
9. Bechu, N, 1998. The Impact of AIDS on the Economy of Families in Cote d’Ivoire.
10. Cuddington, J.T., 1993. Further Results on the Macroeconomic Effect of AIDS in Malawi, World Bank Economic Review, Vol. 7, pp403-17.
11. Cuddington, J.T., 1993. Modelling the Macroeconomic Effects of AIDS, with an Application to Tanzania, World Bank Economic Review, Vol. 7, pp172-89.
12. Bell et al, 2003. The Long Run Economic Costs of AIDS: Theory and an Application to South Africa. http://www1.worldbank.org/hiv_aids/docs/BeDeGe_BP_total2.pdf
13. AVERT HIV/AIDS Statistics, 2005.

errr sorry no idea why the table is coming on as single column :S