21661 DEVELOPMENT BRIEF- Numbef 17 The World Bank July 1993 The macroeconomic penditures by households and the (public or private) health care sys- effects of AIDS tem to assist AIDS patients and effects of AIDS their families in coping with dete- riorating health. It has been esti- Without decisive policy action, AIDS could reduce matedthatinTanzania,for Tanzania's GDP in 2010 by 15-25% example, the average cost incurred per adult AIDS patient over the du- T he acquired immunodefi- The effects of AIDS can be ration of the patient's illness is ap- ciency syndrome (AIDS) grouped in two categories: those as- proximately T Sh5O,000, assuming epidemic in Africa has sociated with rising morbidity and that the present centralized health received considerable attention those associated with rising mortal- care delivery system (not home- from epidemiologists and demogra- ity rates for particular age cohorts, based care) remains in place and phers, as well as health economists especially sexually active adults that 60% of the required drugs for concerned with the impact of the and children infected at birth. treatment are actually available. For disease on the health sector. Given children, the corresponding figure the alarming-and still growing- is T Sh34,000. These figures imply prevalence of the disease in parts of AIDS could d annual costs per adult patient of C6te d'lvoire, Kenya, Malawi, Tan- A colT Sh33,000 and per child patient of zania, Uganda, Zaire, and Zimba- T Sh34,000, under the assumption bwe, several questions are being Tanzania s that the typical adult with AIDS raised: Will AIDS have important lives one and a half years and the macroeconomic effects on the working-age typical child with AIDS one year. stricken societies? If so, what will Comparing these figures with these effects be, and to what extent Opulation Tanzania's per capita income, can various policies alter them? P which was roughly T Shl2,500 in Bank consultant John 3 b L 1988, it is clear that these AIDS- Cuddington, an economist at in 2010 by 20/ related health care costs could Georgetown University, developed become a tremendous burden as a Solow-style model to study the ef- the epidemic worsens. fects of the AIDS epidemic on the Rising morbidity The AIDS epidemic will affect growth path of the economy and The rise in morbidity will have two saving through several mecha- GDP per capita.* The model uses immediate effects: reducing labor nisms: The direct effect of higher conjectures about the demographic productivity and increasing health medical expenditures will presum- effects of AIDS in Tanzania to esti- care spending. These effects, in ably reduce saving as well as mate the macroeconomic effects on turn, may alter savings behavior as nonhealth current expenditures to the economy. well as investment in education. some extent. In addition, AIDS may The findings: Without decisive The negative labor productivity ef- affect saving through its effect on policy action, AIDS may reduce fect will arise because sick or wor- the growth rate, life expectancy, age Tanzanian GDP in the year 2010 by ried workers are less productive structure, and healthiness of the 15-25% in relation to a counter- than happy, healthy workers. Even population. Whether the negative factual no-AIDS scenario. Per capita the productivity of those who do savings effect falls on private or income levels are expected to fall by not have AIDS may fall as infection public saving will depend on the 0-10% by 2010. and illness rates among friends, nature of the health care delivery _______ -- - families, and coworkers rise. system. The fall in domestic saving 'For more details, see John T. Cuddington, "Modeling the Macroeconomic Effects of AIDS, with an Application to Tan- The positive health care expendi- will imply a reduction in capital zania," World Bank Economic Review 7 (May 1993):17349. ture effect refers to increased ex- formation, and if it is substantial, it FILE COPY would be a potentially large ad- Rising mortality ture of the population toward the verse effect on per capita income The gradual rise in mortality rates younger age cohorts. over the long term. caused by AIDS will have two im- The shifts in age structure can be Higher medical expenditures- portant demographic aspects, with expected to have important effects and ultimately higher funeral macroeconomic consequences. on both aggregate supply and ag- costs-will reduce other current ex- First, there will be a slower popu- gregate demand. On the supply penditures, not just saving. Fami- lation growth rate, which will result side, the size of the working-age lies with the AIDS illness may in a smaller population at each fu- population (and perhaps the par- attempt to increase saving in antici- ture date. The presumption from ticipation rate of the labor force) pation of having to pay large funeral demographic simulations is that the will be reduced. The smaller work- expenses in the not-too-distant fu- effect of higher death rates will ing-age population will directly re- ture. And anecdotal evidence sug- more than offset any change in birth duce potential output (even if gests that reduced spending on rates, so that the population growth participation rates and the rate of education (reduced supply) may be rate will indeed fall. Fertility rates capital investment are unaffected). an important consequence of bal- may change if, as the prevalence of The loss in output could be exacer- looning health care expenditures. AIDS rises, women alter their child- bated by a fall in labor force pro- As AIDS becomes more preva- bearing behavior because of various ductivity as the average age and lent, the perceived costs and ben- economic and noneconomic consid- experience of the labor force de- efits from new investments in erations (which could cut in either clines. human capital will change. Total direction). And AIDS may change On the demand side, the shift in expenditure will shift toward the number of women in the vari- the size and composition of the health care and away from school- ous childbearing-age cohorts, affect- population will affect the level and ing. To the extent that AIDS re- ing the overall birth rate, even if composition of public expenditures, duces expected lifetimes, the behavior patterns within each age as well as the economy's overall incentives for individual workers cohort are unchanged. According to (private and public) savings rates. or their employers to invest in edu- demographic simulations in a 1990 For example, the smaller absolute cation and training will also be re- World Bank report, the size of number of younger people will duced. Shifts in the relative wages Tanzania's working-age population place lower demands on the educa- of skilled and unskilled workers in 2010 will be roughly 20% smaller tion system. caused by differences in the preva- because of the AIDS epidemic than Finally, overall consumption rates lence of AIDS among various skill it would be without it. will be higher because of the younger groups might also affect decisions Second, a rising number of deaths age structure. to invest in human capital. from AIDS will shift the age struc- Development Briefs are issued by the World Bank to inform the media, business, academic, and government policy communities about development policy analyses and results from the Bank's research activities. 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