The Long-Run Economic Costs of AIDS : A Model with an Application to South Africa

Primarily a disease of young adults, AIDS imposes economic costs that could be devastatingly high in the long run by undermining the transmission of human capital—the main driver of long-run economic growth—across generations. AIDS makes it harder for victims’ children to obtain an education and deprives them of the love, nurturing, and life skills that parents provide. These children will in turn find it difficult to educate their children, and so on. An overlapping generations model is used to show that an otherwise growing economy could decline to a low-level subsistence equilibrium if hit with an AIDS-type increase in premature adult mortality. Calibrating the model for South Africa, where the HIV prevalence rate is over 20 percent, simulations reveal that the economy could shrink to half its current size in about four generations in the absence of intervention. Programs to combat the disease and to support needy families could avert such a collapse, but they imply a fiscal burden of about 4 percent of GDP.