Economic Costs of AIDS

World Bank Group
July 23, 2003

Long term economic impact of HIV/AIDS more damaging than previously thought

A new World Bank research report warns that HIV/AIDS causes far greater long-term damage to national economies than previously assumed, for by killing mostly young adults, the disease is robbing the children of AIDS victims of one or both parents to love, raise and educate them, and so undermines the basis of economic growth over the long haul. This suggests that a country like South Africa could face progressive economic collapse within several generations unless it combats its AIDS epidemic more urgently.

According to the new report "The Long-run Economic Costs of AIDS: Theory and an Application to South Africa" most studies of the macroeconomic costs of AIDS, as measured by reduced GDP growth rates, do not pay enough attention to the way in which human knowledge and potential are created and can be lost. This is one of the key channels influencing long-term growth. In Africa, for example, where the epidemic has hit the hardest to date, existing estimates range between a modest decline of 0.3 and 1.5 percent in GDP growth annually. In contrast, the report argues that the costs are likely to be much higher.

"Previous estimates overlooked the impact of HIV/AIDS on children if one or both parents die, how they can suddenly become orphans, how they become vulnerable to dropping out of school, and how, in this way, the disease weakens the ability of today's generation to pass on its skills and knowledge to the next," says Shanta Devarajan, co-author of the new research findings, and Chief Economist of the World Bank's Human Development Network. "In those countries facing an HIV/AIDS epidemic on the same scale as South Africa, for example, if nothing is done quickly to fight their epidemic, they could face economic collapse within several generations, with family incomes being cut in half."

The process whereby AIDS sharply reduces economic growth, even to the point of economic collapse, brings three factors together in a particularly devastating combination. First, AIDS selectively destroys human capital, that is, peoples' accumulated life experiences, their human and job skills, and their knowledge and insights built up over a period of years. It is primarily a disease of young adults. As these infected adults become progressively sick and weak, they steadily lose their ability to work. Eventually, the disease kills them in their prime, thereby destroying the human capital built up in them over the years through child-rearing, formal education, and learning on the job.

Second, AIDS weakens or even wrecks the mechanisms that generate human capital formation. In family homes, the quality of child-rearing depends heavily on the parents' human capital. If one or, worse, both parents die while their children are still young, the transmission of knowledge and potential productive capacity across the two generations will be weakened. At the same time, the loss of income due to disability and early death reduces the lifetime resources available to the family, which may well result in the children spending much less time (if any at all) at school.

Third, the chance that the children themselves will contract the disease in adulthood makes investment in their education less attractive, even when both parents themselves remain uninfected. With too little education and knowledge gathered from their parents, as well as being deprived of parental love and guidance throughout their childhood, the children of AIDS victims later become adults who themselves are less able to raise their own children and to invest in their education. The process is insidious, since the effects are felt only over the long-run, as the poor education of children today translates into low adult productivity a generation later, and so on. But if nothing is done, the report warns, the outbreak of the disease will eventually precipitate economic collapse.

"Economic analysis for practical policy-making often pays too little attention to the wider economic context," says Hans Gersbach, co-author and Professor of Economics at Heidelberg University, Germany. "We have attempted to go beyond conventional reasoning where the long run effects of AIDS are concerned. The threat of a downward spiral in levels of human capital and productivity when a society is assailed by an epidemic like AIDS must be a centerpiece of a broad macroeconomic perspective."

"This report confirms how important it is for policymakers to act swiftly and effectively to prevent the spread of HIV/AIDS, and to treat those with the disease." says the study's co-author Clive Bell, a visiting World Bank Research Fellow, and Professor of Economics at Heidelberg University. "Keeping infected people alive and well, especially parents, so they can continue to live productive lives and take care of the next generation, is not only the compassionate thing to do, but it is also vital for a country's long-term economic future." The Bank is active in fighting HIV/AIDS in all regions. Over the last few years, it has committed US$1.6 billion in grants, loans and credits for HIV/AIDS programs worldwide. The Bank is especially engaged in Sub-Saharan Africa, where more than 29 million adults and children are infected with HIV/AIDS. As of July 2003, the Bank had committed more than US$800 million for HIV/AIDS programs in 23 African countries.

The World Bank Report "The Long-run Economic Costs of AIDS: Theory and Application to South Africa"
More Information on Health, Poverty and Development
More Information on Poverty, Debt, and Development
More Information on the World Bank

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.