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Macro-Economic Implications of HIV/AIDS

By Alex de Waal,
Programme Director, Commission for HIV/AIDS and Governance in Africa Economic Commission for Africa

May 2003

Addis Ababa, Ethiopia

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In my presentation to this Committee of Experts I would like to outline some of the major macro-economic impacts of the HIV/AIDS epidemic in this continent. In this part of the presentation, I am indebted to the work of my colleague, the research director of the Commission for HIV/AIDS and Governance in Africa, Dr Nana Poku. In the final part of my presentation I shall briefly touch upon the programme of work envisaged at the Commission for HIV/AIDS and Governance in Africa, chaired and led by the Executive Secretary of the ECA, in response to these impacts.

The HIV/AIDS pandemic is the greatest public health disaster of our age. Overcoming HIV/AIDS is a survival issue, not only for tens of millions of people on this continent, but also for our aspirations for overcoming poverty and hunger.

As my colleague Patrick Asea outlined this morning, HIV/AIDS is a global pandemic. But it is concentrated in Africa, which contains some 70% of the people living with HIV and AIDS across the world.

The overall rate of HIV infection in Africa at the end of last year was 8.8%. While some countries have low or declining prevalence rates, in most countries it is rising. HIV surveillance data are now registering infection rates in adults of over 20% in seven countries. A report last year by the U.S. National Intelligence Council sounded the alarm bell for a `second wave' of countries, in which prevalence is low but rising. In Africa, Nigeria and Ethiopia were singled out as causes for concern.

Prevalence continues to rise in most countries even beyond levels of infection that few predicted as probable a few years ago. When HIV prevalence reaches 35% of adults, it implies that a teenager has a lifetime chance of contracting HIV of about 75%. This is a catastrophic reduction in life expectancy.

In Southern Africa, less than half of today's 15-year olds-in some countries less than a third-can expect to live out a normal adult lifespan, reaching age 60. Twenty years ago, the figure was over two thirds. Infection is concentrated in the working age population (ages 15-45); with women infected at earlier ages then men, and rather more women infected overall than men.

According to the latest UNAIDS figures, an estimated 20 million Africans have died since the start of the HIV/AIDS epidemic. A further 29.4 million are presently living with the virus.

Fewer than one in five hundred people living with HIV and AIDS on this continent are currently on a prescribed course of anti-retroviral treatment. This number will certainly increase, as the price of drugs comes down and the funds for AIDS treatment increase. But we all know the formidable constraints to scaling up health care treatment. In this country, Ethiopia, despite a substantial expansion of health service provision in the last 12 years, only just over half of the population lives within reach of a health clinic.

We must face the unpalatable reality that most of those nearly 30 million Africans who are living with HIV today will die within the next ten years. This means that up to 50 million people will have died from HIV-related illnesses, including AIDS, before the end of the present decade.

The main focus of my presentation this afternoon is not on this human tragedy, written ten million-fold across our continent, but on the wider social and economic impacts that this brings in its wake.

Impact has a number of dimensions. Public health specialists tell us of the associated epidemic of tuberculosis that is also claiming lives. Child mortality rates are rising, largely because of the numbers of children infected with HIV by their mothers. Recent gains in child survival are being reversed by this alarming trend.

One impact of particular concern is orphans. Today there are millions of children orphaned by AIDS, and the number is growing. And it will continue to grow as long as the number of AIDS deaths continues to rise. And it will remain high even if the HIV prevalence is brought down. Consider Uganda. This is Africa's `success story' in reversing the AIDS epidemic. HIV rates peaked in about 1991-2 and have come down substantially since then. But the numbers of children orphaned by AIDS is only peaking now. So even when we have success in confronting AIDS, there is a big price to pay for years to follow.

Another dimension to impact is in terms of the economic effects of HIV/AIDS, including its impact on poverty and the capacity to deliver development.

In families and communities afflicted by HIV/AIDS, poverty is intensifying and deepening - even for households with apparently greater capacity to deal with financial shocks.

Productive capacity is being reduced in all sectors - both public and private - at the same time as demands are increasing, particularly for public goods such as health and education.

Let me ask, what do we know about this epidemic of HIV/AIDS and its impacts on governance and development?

As we enter the third decade of living with the pandemic on the African continent, it possible to make at least two general observations about the unique challenges posed by HIV/AIDS.

First, HIV/AIDS is at one and the same time both a crisis and chronic condition. It is a crisis because the speed with which the virus has spread has proved to be quite overwhelming.

It is also a crisis because HIV/AIDS appears to interact with other stresses and shocks in unpredictable ways. The velocity with which last year's food crisis unfolded in southern Africa was surprising to many, who had not anticipated such a vicious interaction between HIV/AIDS and food insecurity. Africa is subjected to many external shocks, and we do not know how these will interact with HIV/AIDS in the coming years.

Second, the epidemic is a chronic condition because, HIV/AIDS impacts most heavily on the most productive sectors of African economies, namely prime-aged adults. Thus, the virus is depriving these economies of scarce skills, children of their parents and a continent of a generation in the prime of their working lives. This is where HIV/AIDS is distinct from most of the other diseases that afflict Africa.

The effects of this will be felt over a long period. Increasingly, economists are focusing on the inter-generational implications of HIV/AIDS. They fear that, in a household in which an adult breadwinner has died of AIDS, the chances for upward mobility among the orphaned children will be much reduced.

Let me focus on the economic impacts of HIV/AIDS. Taking into account the pace, intensity and destructiveness of the pandemic, it is reasonable to assume that HIV/AIDS poses the greatest current challenge to sustained economic development on the African continent.

As such, understanding its implications for economic policy, planning and outcomes demands our immediate attention.

HIV/AIDS is affecting African economies in a number of different ways. Three levels in particular are worthy of note: aggregate, household and fiscal.

Aggregate impacts

At the aggregate level, early studies of the impacts of HIV/AIDS on African economies indicated that the pandemic would probably only reduce the growth rate of Gross Domestic Product (GDP) by between 0.4 and 1.5 per cent.

Many economists and planners held view that the size of this reduction would be well within the range of variation that could be caused by poor economic management or fiscal policy, or indeed external shocks such as drought. This in turn led to some complacency among policy makers in dealing with HIV/AIDS.

But reflect what a year-on-year shackle of 1% on growth means for an economy already buffeted by various shocks and constraints. Projected over a decade or so, the different between an annual growth rate of 4% without AIDS and one of 3% with AIDS adds up to a formidable lost opportunity to reduce poverty.

As the epidemic has progressed, moreover, it is increasingly becoming clear that longer-term macro-economic implications of the pandemic could be more dramatic.

A recent analysis of the Kenyan economy, for example, has indicated that HIV/AIDS could leave the Kenyan economy one-sixth smaller than it would be without a high HIV prevalence by the year 2015. Similarly, a study in South Africa has indicated that by the year 2020, the level of GDP could be lowered by 17 percent due to HIV/AIDS; while the level of per capita GDP could be lower by 7 percent.

About half the decline is attributable to increase in current government spending to pay for health care associated with the epidemic; another third of the decline is attributable to lower productivity.

And consider that these projections are based upon models and data that are open to question. Concerning models, some at least have an implicit assumption that African economies suffer from excess labour, so that a reduction in the size of the labour force is not necessarily harmful. The implication is that returns to skilled labour will actually increase as the labour force shrinks. Recently, analysts have argued that HIV/AIDS will not only lead to a loss of human capital but also to the weakening of mechanisms whereby knowledge and skills are transmitted and acquired. If this is correct, African economies-or parts thereof-will struggle to retain current skill levels.

Concerning data, we are necessarily constrained by the fact that the epidemic is only two decades old, and that we have only seen the upward slope of the curve. The economic data we have for countries with high prevalence rates only covers a short time series, and so far does not include periods in which AIDS deaths have risen towards their peak.

In short, there is much we don't know. All we can say for certain is that we have not seen the worst of the AIDS epidemic, and that the future will not resemble the past.

Household Level Impacts

The discussion so far refers largely to broad macroeconomic impacts at the level of aggregation.

It is, however, the case that the most direct impact of HIV/AIDS mortality and morbidity is at the household level - the very base of the economy.

Clearly, not all households are affected by HIV/AIDS in the same way, most obviously depending on whether or not household has a member who is HIV positive. However, the impact on households with HIV normally broadly the same pattern:
  • Loss of income, if a breadwinner stops work due to sickness or death (this is a permanent impact);
  • Loss of income if a breadwinner has to stop work to look after a sick family member (this is temporary or transient impact);
  • Additional expenditure on health care and eventually funeral costs (a transient impact).
Households typically use up much of their savings to meet these costs. They may also sell assets to meet urgent expenditure needs. AIDS death brings with it loss of productive resources through the sale of livestock to pay for sickness, mourning and funeral expenses, as well as sharp decline in productivity.

Sickness also contributes to the scarcity of labour because of both the incapacity of workers and the time others have to devote to looking after them. The extended families of people who have fallen sick and died of AIDS also suffer economically because of the burden of supporting and educating children orphaned by AIDS. In this context we must note that it is women who undertake the great majority of the work of caring for the sick and bringing up children. Most of this work is unremunerated and is statistically invisible.

The net effect of these losses is that such households rarely recover even their initial level of living, since their capacity is eroded. As a result, a true process of structural economic decline quickly sets in.

It is therefore reasonable to expect that HIV/AIDS will bring about increase in the proportion of households that are poor.

Fiscal (government level) Impacts

The literature on the impact of HIV/AIDS on African governments' fiscal policy suggests there will be direct effects on some of the key areas of government spending, most obviously the health budget. Just as households afflicted by AIDS switch from savings to spending on immediate needs, governments may be compelled to do the same.

There will also be a range of indirect effects arising from the aggregate economic impacts, and the increase in poverty noted earlier. These can be expected to reduce the ability of governments to raise tax revenues (since these depend on the size of the economy), while increasing the demands on government expenditure, including poverty alleviation measures.

One of the effects of HIV/AIDS is to act as a kind of employment tax, because of the increase in benefits payments, the higher staff turnover, increased absenteeism, and increased recruitment and training costs. HIV/AIDS is substantially adding to the wage bill of a number of private sector companies. There is a fear that the costs of AIDS to companies will discourage investment in Africa.

Moreover, HIV/AIDS will distort development spending on other areas, since it will be necessary to use resources in a `defensive' way.

While we know a considerable amount about what HIV/AIDS means to specific sectors, we don't know what it will mean comprehensively for macro-economic and national development planning.

In this regard, we must also consider how the economic challenges of the HIV/AIDS epidemic are relevant to our other two issues for discussion today. The reform of the Bretton Woods Institutions is relevant, insofar as current modalities for assistance do not take into account the special plight of countries suffering from high rates of HIV and AIDS. In addition, the increased funding available for HIV/AIDS programmes - some of it very substantial - can potentially conflict with demands for fiscal discipline. It would be unfortunate if, just as mainstream ODA moves towards a best practice based upon mutual accountability, medium or long-term budgetary support, and outcome monitoring, HIV/AIDS funding were to revert to old-style programme funding, with insufficient harmonisation. These issues are already raising themselves, and demand our urgent attention.

Let me now address the wider demographic and labour implications of the epidemic.

This focus on headline figures of overall growth and household economies, however, conceals a number of important impacts, some of which must be considered systemic.

Take, for example the issue of HIV/AIDS related mortality, particularly among the working age population. This has had the effect of sharply reducing life expectancy across the continent. For sub-Saharan Africa, life expectancy at birth rose by a full 15 years from 44 years in the early 1950s to 59 in the early 1990s. Due to HIV/AIDS the figure is set to recede to just 44 years between 2005 and 2010.

It follows that the demographics of the continent are being systematically changed by the epidemic, most obviously in respect of adult mortality, which has doubled in most countries, and a reversal of trends in under-5 mortality caused by increasing levels of HIV transmission from mother to child.

One of the most important consequences is a change in the age pyramid of the population, with a narrowing of the distribution in the working age population, and consequent problem with respect to age dependency, with larger numbers of youthful and elderly dependents. As a result, the age structure of the population and labour forces is also changing in many African countries. This is happening at a time when the overall workforce is also contracting - a process that is functionally inter-related. The ILO estimates that the workforce will contract by up to 20 per cent in the SADC sub-region by 2015.

We must also note that with women comprising 58% of those living with HIV and AIDS, and moreover becoming infected at younger ages, we will see a gender imbalance among adults.

It is reasonable to expect, therefore, that reductions in labour supply, due to declining life expectancy, will adversely affect output; an impact that will be compounded by reductions in productive efficiency associated with increased incidences of ill health and shortages of critical skills. Moreover, such decline in economic activity will take place against a background of rising social service expenditure, both private and public, and is also likely to reduce savings rates as well as to increase poverty.

The final substantive part of this presentation focuses on the impacts of HIV/AIDS on institutional capacity.

One of the peculiarly vicious tragedies of HIV/AIDS is that, just as it is demanding that we do more, it is undermining our capacity even to maintain what we are doing today. In a number of countries, the deaths of skilled personnel due to AIDS is exceeding the number that are being trained. Deaths of teachers and health professionals are stretching the already limited capacities of these key sectors.

Among those who remain, productivity is often affected by absenteeism - for example to attend funerals or care for sick relatives - and lowered morale.

Managing institutions while staff have shorter career trajectories and faster turnover also imposes severe strains. The loss of key members of staff can impair institutional functioning, because they possess key elements of institutional knowledge. The time and money spent in recruiting and training staff is increased.

Some of the capacity crisis can be addressed by providing anti-retroviral treatment. But we must also consider the increased and increasing impediments to capacity building caused by this dreadful disease.

As this Committee of Experts knows only too well, it is one thing to present a problem. It is quite another to present practical responses and solutions. Let me now turn to the challenge that faces us.

Although the overall impact of AIDS on the macro-economy is small at first, it is likely to increase significantly over time. Unfortunately, HIV prevalence continues to rise in most African countries, indicating that most of the likely impacts lie in the future. However, the time lag between increasing HIV rates and increased AIDS deaths also provides us with a time-window in which to implement policies to mitigate the impact.

The ability of African governments to devise these policies will depend on two factors. The first is our understanding of the long-term macro-economic challenges posed by the pandemic. The second is our ability to marshal adequate and sustained resources - both financial and human - to mitigate these adverse impacts.

Some of the key steps that need to be taken include examining the following questions:
  • What are the impacts of HIV/AIDS for national budgeting strategies?
  • How will the necessary resources for Ministries of Health be mobilised?
  • How would scaled-up HIV/AIDS programmes be accounted for in the formulation of national poverty reduction strategies?
  • Are there any tensions between the need to respond to HIV/AIDS in the health and social service sectors, and the broader budgetary challenges facing Ministries of Finance?
  • What are the human resources and capacity needs required to mitigate the impacts of HIV/AIDS on national economies?
  • What is the distribution of the epidemic in terms of its impact on skills and experience?
  • How are we to measure the impact of HIV/AIDS on the hitherto unremunerated and unmeasured contribution of women to household production and social reproduction?
Let me briefly outline some of the steps that the Commission for HIV/AIDS and Governance in Africa, here at the ECA, plans to take in order to address these challenges.

It is the realisation of the scale and urgency of these challenges that has impelled United Nations Secretary-General Kofi Annan to establish the Commission on HIV/AIDS and Governance in Africa (CHGA) under the chairmanship of Executive Secretary K.Y. Amoako.

The CHGA stems from the consensus reached here at the Africa Development Forum 2000, and the commitment made by African Heads of State at the Abuja Summit of April 2001. It builds upon the work of UNAIDS, the Global Fund for AIDS, TB and Malaria, and a range of other initiatives related to this issue. It brings expertise from across the United Nations system and existing research capacity in Africa to bear on this challenge.

There will be 20 eminent Commissioners, African and non-African. It will last two years, as an accelerated programme of research in critical areas, augmented by policy engagement and advocacy.

CHGA will seek to build upon existing research innovations and knowledge but also define a more comprehensive and comprehensible agenda for HIV/AIDS, development and governance in Africa.

It will study many of the issues raised in this presentation, including: How HIV/AIDS impacts upon different levels of society; How we can mitigate these impacts, keeping governance and development on track despite the epidemic; How we can address the governance and capacity demands of a scaled-up response to HIV/AIDS.

This is the first time that this Committee of Experts has considered the issue of HIV/AIDS and its impact on governance and development. Sadly, I fear it will not be the last. But I hope that on future occasions, my colleagues and I will be able to present to you the results of our research, and the practical policy recommendations we have developed, for your consideration and use.

We are facing a tremendous challenge. But it is encouraging to see the extent to which we are beginning to address it. This terrible disease is killing our brothers and sisters. Let it not also kill our hope.

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