*EPF310 07/23/2003
Text: Economic Consequences of HIV/AIDS Will Grow over Time, Study Finds
(World Bank report shows human capital losses affect future) (1610)

The loss in human capital caused by HIV/AIDS will translate into long-term economic consequences in any nation that fails to cope with the disease, a new World Bank study finds.

A July 23 press release describing the findings indicates that the deaths of young, productive adults from AIDS deprives their orphaned children of the nurturing, education and knowledge that parents pass to offspring. That effect will multiply in the future as those children grow into adults who are ill prepared to create a healthy upbringing for the next generation. "The Long-run Economic Costs of AIDS: Theory and an Application to South Africa" finds that these potential consequences are more significant than estimated in previously conducted studies.

"We have attempted to go beyond conventional reasoning where the long run effects of AIDS are concerned," said Hans Gersbach, co-author and professor of economics at Heidelberg University, Germany. "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."

Even beyond the personal tragedies that these trends represent, the study envisions wide-ranging social and economic consequences. Social inequalities are likely to widen between AIDS orphans and properly raised children. Further, the deaths of young, productive adults weakens a country's tax base and reduces its capability to provide public services for sick people and orphans.

The full text of the report is available on the World Wide Web at http://www.worldbank.org/aids

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The World Bank Group
July 23, 2003

LONG TERM ECONOMIC IMPACT OF HIV/AIDS MORE DAMAGING THAN PREVIOUSLY THOUGHT

WASHINGTON - 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 per cent 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."

In the early phases of the epidemic, economic damage may appear to be slight. But as the transmission of capacities and potential from one generation to the next is progressively weakened and the failure to accumulate human capital becomes more pronounced, the economy will begin to slow down, with the growing threat of collapse.

This raises important social and fiscal implications for economic policy. The first is the threat of worsening inequality. If the children left orphaned are not given the care and education enjoyed by those whose parents remain uninfected, there will be increasing inequality among the next generation of adults and the families they form. Social customs of adoption and fostering, however well established, may not be able to cope with the scale of the problem generated by a sharp increase in adult mortality, thereby shifting the onus onto the government. The government itself, however, is likely to experience increasing fiscal problems and so be unable to fully finance this additional task.

Second, by killing mainly young adults, AIDS seriously weakens a country's tax base, and reduces its ability to finance public expenditures, including those aimed at accumulating human capital, such as education and health services not related to AIDS. In this way, the damaging impact of HIV/AIDS on economic growth over the longer run is intensified. As a result, national finances will come under increasing pressure. Slower economic growth means slower growth of the tax base, at the same time as governments face growing demands to treat the sick and care for orphans.

"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 World Bank and HIV/AIDS

The Bank is active in fighting HIV/AIDS in all regions. Over the last few years, it has committed US$1.6 billion [$1,600 million] 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. All of the poorest countries in Africa are on track to receive grants from the World Bank for their HIV/AIDS national programs. Policy guidance and special initiatives are offered for middle-income African countries with high HIV prevalence, such as Swaziland and others parts of Southern Africa. In these countries, the Bank is providing implementation and technical support, and knowledge services to complement financing from the Global Fund For AIDS, Tuberculosis, and Malaria, and other sources.

"While there is much economic analysis that shows how costly it is to provide prevention, care and treatment to the millions that are infected and affected, there are far fewer studies that show how costly it is not to act." says Debrework Zewdie, Director of the World Bank's Global HIV/AIDS Program. "This new study will help fill this gap, and its approach should persuade governments of the need to draw up a plan of action and act on it."

The full text of the report is available on the World Wide Web http://www.worldbank.org/aids

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(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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