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Mind your Business - 14 February 2005
AIDS - The Economic Impact
The News
Global warming is often cited as being one of the most challenging issues facing the world today. Every record temperature, flood, storm or drought is heralded as evidence of the inexorable march towards global disaster. Whilst there are certainly concerns about the effects we are having on our planet, the effects may be many years away.
For some, the most pressing issue is provided by a more immediate problem - the problem of HIV/AIDS. Chris Smith, the former Cabinet minister, announced that he had been living with HIV for the last 17 years. Mr Smith was the first Cabinet minister to openly reveal his homosexuality in 1997. His decision to make public his HIV status comes after Nelson Mandela, the former South African president, had made a similar public announcement about the death of his son, Makgatho early in 2005. That announcement was so significant because of the taboo that surrounds the disease in Africa. Such a taboo is seen as being one of the problems that must be overcome if the epidemic in that continent is to be tackled.
The disease still has problems throughout the world in shaking off the stigma that is attached to it. Prejudice, ignorance and discrimination all contrive to make raising the awareness of HIV/AIDS and placing it at the forefront of policy making more difficult.
The attitude in South Africa highlighted by Nelson Mandela is testament to this problem. Meanwhile health officials throughout the world are warning of the looming disaster that the disease presents. The economic cost of HIV/AIDS is massive. The sheer scale of the problem, particularly in developing countries, is difficult to comprehend.
The disease is commonly referred to as AIDS (Acquired Immune Deficiency Syndrome) but more correctly, AIDS is the advanced stage of the disease. The virus (Human Immunodeficiency Virus, HIV) uses the body's cells to reproduce itself and in so doing damages the body's ability to fight off diseases and illness. At the later stage, referred to as AIDS, the body cannot fight off infection and the sufferer usually dies from the inability to be able to deal with illnesses that healthy people would have no problem fighting off.
The time between contracting the virus and it developing into AIDS varies widely between sufferers and can be slowed down through drugs developed in recent years. There is currently no cure for the virus but managing the disease is becoming more sophisticated - but does cost money.
The decision by Chris Smith to make public his last 17 years with HIV is part of an attempt to change the stereotype and image of the disease and those who suffer from it. Both Smith and Nelson Mandela may be small fish in the total sea but their attempts to put the issue, once again, to the front of the political agenda may well be a catalyst that begins to change attitudes and influence policy.
Theory
Essentially, the existence of the disease imposes private costs on the sufferer and external costs on society as a whole. Whilst not wishing to diminish the seriousness of the issue in the UK, this discussion will focus on the economic problems facing regions of the world where HIV infection rates are exceptionally high and where the cost to these countries is at the root cause of global concern.
The effect on the economies of those countries with the highest rates of infection will manifest themselves in several key areas:
The Labour Market
Productivity
The Savings Ratio
Government Finances
Living Standards
Image: Reducing the stigma surrounding HIV/AIDS is a key challenge to all countries. The association of the disease with the sex industry detracts from its widespread nature and influence. Graffiti in Brooklyn, New York reads 'Do not pick up girls in this area thay got AIDS'. Copyright: Tammy S, stock.xchng
The Labour Market
The labour market consists of several factors:
The quantity of labour
The quality of labour
The structure of the labour force
The quantity of labour will be hit most obviously by the high mortality rates that exist in these countries. A smaller supply of labour will mean that there are less workers available to carry out production which could in turn lead to a fall in output and national income (GDP).
Not only will the actual supply of labour be affected, there will be an impact on the quality of that supply. The disease is no respecter of skill level or ability and its incidence could affect the most productive workers in the community. In addition, experienced workers who are able to transfer their skills and experience to others may also be affected and this aspect is often an important feature of labour markets in developing countries.
The structure of the labour force could be affected if the mortality rates are high in the working population. This distorts the labour force as well as increasing the dependency ratio.
Productivity
Productivity is output per worker per period of time. HIV not only reduces the number of workers in the labour force but also leads to increases in absence due to the illness and the necessity of training new workers to replace those who die. All of these factors would tend to reduce productivity and thus increase the costs of production for businesses. This will, in turn, contribute to a reduction in competitiveness and further impact on the level of GDP.
The Savings Ratio
The savings ratio is the proportion of income saved as opposed to being used for current consumption. The savings ratio is an important component in economic growth. The Harrod-Domar model(http://www.bized.co.uk/virtual/dc/copper/theory/th7.htm) suggests that increases in the savings ratio will help to provide the funds for investment in capital, which in turn, improves the capital output ratio and contributes to economic growth.
The prevalence of HIV means that individual families are likely to see their incomes falling if key family members die or are incapacitated and there may also be extra costs incurred in securing health care which will take up more income. As the savings ratio falls so the amount available for investment declines and productivity of the economy is further damaged.
Government Finances
Governments will also be hit by the level of infection. The increased mortality rates amongst the workforce will not only reduce the amount of tax revenue but also lead to increases in spending on health care for those that are ill and possibly highly unproductive. The government gets sucked into a spiralling fiscal problem.
As production levels are hit, some products that generate high levels of tax revenue may be disproportionately affected as resources are transferred to the generation of low value added basics further exacerbating the fiscal problems.
In addition to this, the number of orphans being created as a result of the disease is placing huge pressures on governments in caring for these children and in finding suitable families to care for them.
Image: The number of children orphaned as a result of HIV and AIDS creates pressures on government social provision and care. Orphans in a shanty town in Cape Town, South Africa. Copyright: Marnix Bras, stock.xchng
Living Standards
All the issues covered above will lead to a decline in living standards as measured by, not only GDP, but also life expectancy, infant mortality and the level and standard of education.
Take the data and identify the top ten countries in terms of the adult rate. (You can copy and paste the relevant information into a spreadsheet.)
Now go to the CIA Factbook and look up the economic situation of these ten countries in terms of their GDP growth rates (select country and then select 'Economy').(http://www.cia.gov/cia/publications/factbook/)
What, if any, conclusions can you draw between the data on HIV infection and the economic state of the countries concerned?
Using the concept of opportunity cost, consider the costs to the individual countries concerned and the global economy of a failure to take steps to combat the rise in HIV in the developing world.
There is a disagreement about the development and provision of anti-retroviral (ARV) drugs for treating those suffering from HIV in such countries. The drugs have been developed - at great expense - by companies in the developed world but can be too expensive for governments in the developing world. The answer may lie in developing countries manufacturing such drugs themselves. Consider the following issues:
Should the developed world ensure that such drugs be made available to the developing world? What might be the economic costs of doing this?
Should drug companies in the developed world erect barriers to entry to prevent countries in the developing world producing cheaper copies of these drugs given that they have had to invest in all the development costs?
Taking a macroeconomic viewpoint, what long-term benefits might developed countries expect to receive from promoting the distribution of ARV drugs to the worst hit countries in the developing world?
Looking at the five key areas described in the 'Theory' section above, take two countries in Sub-Saharan Africa (or any other region in the developing world) and considering the data on HIV infection(http://www.avert.org/subaadults.htm) and the data on the economies of these countries using the CIA Factbook(http://www.cia.gov/cia/publications/factbook/) and the Penn World Data on Biz/ed(http://www.bized.co.uk/dataserv/penndata/pennhome.htm), look at the state of their economies.
What evidence is there that the factors mentioned in the 'Theory' section are beginning to manifest themselves in these countries?
Related Web sites for Research
HIV & AIDS Statistics - from AVERT, a charity dedicated to helping prevention and treatment of HIV (http://www.avert.org/statindx.htm)
Using the concept of opportunity cost, consider the costs to the individual countries concerned and the global economy of a failure to take steps to combat the rise in HIV in the developing world.
Opportunity cost is the cost expressed in terms of the next best alternative sacrificed. The question is, therefore, looking for you to think about what sacrifices may have to be made in relation to a failure to deal with the situation. Here you need to think about what is likely to happen if the matter gets worse and what the costs therefore could be.
Consider the following issues:
Should the developed world ensure that such drugs be made available to the developing world? What might be the economic costs of doing this?
The issues here relate to the prices that people will have to pay to buy the drugs. The developed world could, in effect, provide subsidised drugs to less developed countries but this has an effect of distorting the market. It reduces the incentive for the developing world to develop its own treatments in addition to the massive cost of providing sufficient drugs to treat those who most need it. Most developed countries are already under pressure to 'look after their own problems' and any shifting resources from domestic issues to international ones are always fraught with danger. Some of the resource suggestions will help you to get further information on this issue.
Should drug companies in the developed world erect barriers to entry to prevent countries in the developing world producing cheaper copies of these drugs given that they have had to invest in all the development costs?
The quick answer to this is no! But, think of it from the drug company's point of view. The cost of developing these drugs is massive with no guarantee that they will work. As a result they have to ensure that they generate revenue from their investment in research and development (R&D) to ensure they have sufficient revenue to continue future research. The importance of ensuring a degree of monopoly power to such companies is vital to their long-term success and survival. If they were open to more competition they might simply be unable to invest in the sort of research that may be required for the future.
Taking a macroeconomic viewpoint, what long-term benefits might developed countries expect to receive from promoting the distribution of ARV drugs to the worst hit countries in the developing world?
The angle here is to look at the benefits that will accrue if the effects of the disease are reduced. In theory, countries will be more productive, their GDP will grow and there will be a bigger market for the developed world. This question is asking you to take a longer term view of the issue rather than the short term issues; the problem is that long term benefits are not of much interest to many of us who are more concerned with the here and now.
What evidence is there that the factors mentioned in the 'Theory' section are beginning to manifest themselves in these countries?
This question is seeking to get you to demonstrate an understanding of the main factors outlined in the 'Theory' section and to marry this up with some data. You need to be looking to see if there is any link between, for example, the incidence of HIV/AIDS and changes to the labour supply or the structure of the population. Is the working population badly affected by the disease? If so, is it having an effect on productivity and national income? Is there evidence that the savings ratio is declining in countries where the incidence of HIV is the greatest?
