Sunday, October 28

Fiscal Impact of AIDS

I mean, managing AIDS is difficult enough without idiots proposing you rub yourself with banana juice or something like that. But seriously, determining the fiscal impact of AIDS over a long period is a notoriously difficult task. You make heroic assumptions and the chances that you are wrong are very high. About 15 years ago, I was asked to consult for a pharmaceutical firm who was interested in determining the impact of longevity on their product finances. It was notoriously difficult. The company considered my findings and methodology and said that they need to go back to the drawing board as there are way too many variables to consider.

But here's a research paper which tries to give that a shot. I quote:

The number of people living with HIV is alarmingly large. The global estimate for the end of 2005 was 38.6 million. Two thirds of those infected with HIV live in Sub-Saharan Africa. Several countries in this region have adult infection rates exceeding 20%. In South Africa, about 5 million people currently live with the infection, which is the highest absolute number of HIV+ people in any country, although not the highest prevalence rate (UNAIDS, 2006).1

AIDS related deaths are dramatically changing the demographic structure of these African countries. In addition to the incomprehensible human suffering of those directly affected, AIDS also has large, negative economic effects on these countries; many of which are already struggling with problems of severe poverty.

This paper explores the economic effects of AIDS in South Africa from 2000 to 2030. This is done in a standard neo-classical growth model where I focus on the fiscal effects of AIDS. The two main questions addressed in this paper are: Can policy interventions designed to treat AIDS patients and fight the spread of AIDS in South Africa be (at least partially) self-financing? What is the optimal government policy of taxes and transfers during a prolonged struggle against AIDS?

South Africa has experienced a long-run demographic transition with falling dependency ratios, due to the fact that most families now have fewer children. However, over the next few years, the dependency ratio will not fall as quickly as it would have in the absence of AIDS.2

There are way too many variables, but controlling for many variables, the author determines that a prevention programme can actually be paid out of the benefits that will be achieved by the reduced death toll, and other benefits. I just hope the South Africans (and India where AIDS is huge!) is listening.

Lars M. Johansson, Fiscal implications of AIDS in South Africa, European Economic Review, Volume 51, Issue 7, , October 2007, Pages 1614-1640. 


The number of people living with HIV is alarmingly large. In addition to the incomprehensible human suffering of those directly affected, AIDS also has large, negative economic effects. In this paper, I study the fiscal implications of the HIV/AIDS epidemic in South Africa in a standard neo-classical growth model. I find that an antiretroviral program is to a large extent self financing. Improvement in dependency ratios and health care cost savings would pay for Rand 144 billion of a full epidemiological intervention. The indirect effect through the changing demographic structure will be more important than the direct health care cost saving effect. I also explore different taxation policies. The households would be willing to sacrifice an amount equal to 12% of GDP in the first period to be subject to an optimal (Ramsey) fiscal policy rather than an alternative fixed debt to GDP policy. The optimal policy implies an increase in government debt during the peak of the epidemic.



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