Economic Impact of HIV AIDS In South Africa

South Africa faces one of the world’s most severe HIV/AIDS pandemics according to the Bureau for Economic Research (BER, 2007:11). The disease was initially only regarded as a serious health crisis, but it is now clear that the pandemic also holds economic consequences for South Africa and also have far reaching socio-economic consequences.

It is difficult to overstate the suffering that HIV has caused in South Africa, both socially and economically. With statistics showing that one in five adults are infected, its not surprising to note that a recent survey found South Africans spent more time at funerals than they did having their hair cut, shopping or even having barbecues (Anonymous). In any economic system, human capital is fundamentally the most important resource for utilizing other factors of production effectively.

Thus, a pandemic of this nature is viewed as a direct threat to the productivity and economic efficiency of the country. This shall be portrayed using a framework that describes how the disease affects the individual economic state, and how these effects ripple outwards to businesses and eventually the macro-economy.

The framework will therefore take into account the Impact on the Individual and on Households, the Impact on the Labour Market, the Impact on Firms and General Industry, and the Impact on the Government. These sections will then follow into a discussion of the Summation of the Aforementioned Factors on the Economy, before drawing into a Conclusion.

2. Definition of Concepts

HIV: Human Immunodeficiency Virus: A sexually contracted virus that causes AIDS.

AIDS: A disease of the immune system caused by the retrovirus HIV, where individuals lose the ability to fight infections, often dying from secondary illnesses.

(Note: Hereafter, the concepts HIV and AIDS will be used interchangeably.)

CG’s: Conditional Grants: Grants afforded by the government to Organisations in order to treat and manage its members who suffer from HIV/AIDS.

3. Economic Impact of HIV/AIDS in South Africa

Figure 1 gives a graphic and structural view of how the macro-economy is affected by the HIV pandemic. This framework also represents theoretical analysis that this paper will follow to get a better understanding of the impact of the disease on the South African economy.

Figure 1: Structural channels of HIV/AIDS impact Source: Vass (2005:2)

In the sections to follow the impact of the pandemic will be analyzed from a macroeconomic point of view.

3.1. Impact on the Individual and on Households:

Individuals suffer from the disease, not the economy, and thus, Individuals will be addressed first (BER, 2007:11): The most notable economic consideration for Individuals suffering from HIV/AIDS is the fact that they often need to spend large portions of their disposable income on treatments, such as antiretroviral treatment, and not on improving their economic standing. Other notable points are absenteeism or early retirement (if employed) from employment due to illness, which hinder individual income dramatically whilst expenditure remains stable or even increases.

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The Bureau for Economic Research (BER, 2007:11) also specifies that the economic impact of HIV/AIDS on households primarily stems from its impact on income and expenditure of such households. A South African study conducted by Casale (2006:11) found that on average, households spend a third of their monthly income on HIV and AIDS related medical expenses. This dramatically lowers the possibility of improving their financial and economic standing.

It is also assumed that increased AIDS deaths among the economically active population is likely to impact negatively on the dependency ratio, more specifically (Vass, 2005:16): poor households will face increasing income vulnerability as a result. Furthermore, these households may have to carry the financial burden when those employed, but infected, retire from work and return to receive care.

Garbus (2003:69) projects that, by 2010, AIDS may contribute to the chronic impoverishment of 26% to 33% more households than would have been the case in the absence of the pandemic. In the following section the effects that is carried over to the labour market will be discussed.

3.2. Impact on the Labour Market:

Table 1 illustrates the progression of HIV/AIDS through the labour force and the potential impact in terms of the increased cost burden to companies and other sectors.

Table 1: Costs in the labour market associated with HIV/AIDS Source: Vass (2005:15)

It is evident that there is a projected burden of HIV/AIDS over 10 year segments (on average) for the labour market. This will impact on both low skilled workers and the overall skills-biased trajectory in employment across most economic sectors. Jones (1996:45) lends support to the theory by saying that HIV infection will become increasingly important for businesses in the second decade of the epidemic since most of the people living with HIV are between 25 and 44 years of age. That makes up over half of the work force in South Africa.

Premature adult mortality is making fewer workers available and causes increasing production costs. HIV/AIDS illness and death are leading to major skill gaps in the workplace (Garbus, 2003:61, 62). Increasingly so, older and younger people will have to enter or remain longer in the labour market, which dramatically alters its composition and effectiveness.

Mohr, et al. (2004:583) corroborates this, saying that an estimated 20% of the adult population in South Africa was HIV infected. This drastically affects the size and composition of the labour force through absenteeism, illness, and a loss of skills and experience.

This assault on the labour market composition will be the prevailing situation unless remedies such as mechanization and technology develop enough to negate this threat. Such remedies will improve individual productivity within the workplace, ultimately, increasing the demand for a less skilled workforce. According to Garbus (2003:61-62) the International Labour Organization projects that; South Africa will lose 10.8% of its labour force by 2005 and 24.9% by 2020.

The economic impact of HIV/AIDS within the labour market subsequently influences Firms and General Industry, thus affecting the overall macro-economic impact of the pandemic. This will be discussed in the following section.

3.3. Impact on Firms and General Industry:

AIDS-related illnesses and deaths to employees affect a firm by both increasing expenditures and reducing revenues (Bollinger, et al. 1999:6). Expenditures are mainly increased for health care costs, burial fees, training and recruitment of replacement employees. Revenues are heavily affected by absenteeism of employees, which in turn leads to a labour turnover with a less experienced and productive labour force.

Yet, investment is the key linkage between business and macro-economic growth (both in production and knowledge building). However, the HIV/AIDS effect in the long-run will be less attractive and could even discourage investing in human capital by industry because of low returns (Casale, 2006:23).

The pandemic can affect individual firms both on the supply side (efficiency losses and subsequent higher production costs) and on the demand side (change in the demand for goods and services produced). A substantial number of South African companies are already suffering the consequences of the pandemic, with 40% of manufacturers and 60% of mines reporting a loss of experience and important skills within their organisation (Casale, 2006:23). Larger companies and those employing mainly semi and unskilled workers have been the most severely affected and this will continue to escalate. What also emerges is that production costs have been affected predominantly through labour productivity and worker absenteeism, followed closely by employee benefit costs.

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Approximately a third of the companies surveyed by The Bureau for Economic Research (BER, 2007:55) report responded that HIV/AIDS has already had a negative impact on profits, with more than half expecting an adverse impact on profitability in five year’s time. HIV/AIDS had a more noticeable impact on the production side of business, with more than 30% of all firms surveyed reporting that HIV/AIDS has reduced productivity or increased their absenteeism. They also reported raised costs in employee benefits and increased labour turnover rates, which had an adverse impact on corporate savings and profits, constraining fixed investment (BER, 2007:12).

Casale (2006:7) states that the effects of HIV and AIDS on business links micro-level behaviour and outcomes (e.g. households, employment decisions) to macro aggregates (e.g. production, employment and growth). Decisions at a business level can translate into changes in national investment, demand for goods and services, employment and economic structure.

In the following section it will be noted that HIV/AIDS also has some sever affects on the government.

3.4. Impact on the Government:

Government expenditure is the main area of focus within this section, with a brief excerpt on its policies to alleviate the negative economic impact of the pandemic. The Government’s role in public health will continue to be placed under increased demand due to direct responsibility. Expenditure on the pandemic by Government will continue to grow in an attempt to manage the disease (Hickey et al, 2003:89). The best form of such expenditure has been in the form of CG’s (when viewed in terms of expenditure versus results).

Figure 2 represents a framework that indicates how government is assisting with the pandemic. The figure merely tries to give a better understanding of how funds are allocated to assist this global disaster.

Figure 2: Government spending on HIV/AIDS Source: Hickey et al (2003:4)

Since health care and related HIV/AIDS expenses are rising, resources available for investment by Government, the private sector, and households are dramatically reduced. This directly affects the Government’s entire macro-economic outlook and its provisional structure (Garbus, 2003:61-62). This often entails reallocation of resources from other sectors but is very likely to reduce the rate of economic growth.

An important challenge for the government will be the increased financial burden stemming from higher public health care and other social spending such as foster grants and institutional care for orphans and will probably coincide with reduced tax revenues. Increased direct and indirect costs will reduce private sector profits, which are likely to have an adverse impact on economic growth and wages, indicating an erosion of the tax base and lower Government revenue (BER, 2003:12, 13). In all likelihood, HIV/AIDS will lead to a shift in spending from “more to less productive avenues” (e.g. from public sector fixed investment to health care services).

On the policies front, the persistently high level of new HIV infections occurring in South Africa reflects the difficulties that have been faced by Government’s AIDS education and prevention campaigns (Anonymous). The future of the pandemic, at least partly depends on the direction of the Government’s HIV and AIDS policies. Although the Government has been widely criticized in the past for its AIDS policies, recent strategies (including the development of a new framework to guide the national response to AIDS from 2007 until 2011) suggest a more balanced outlook for providing some economic relief from the pandemic.

Implementation of a multi-sectoral integrated HIV/AIDS response in South Africa depends upon the successful practice of co-operative governance principles – both vertically and horizontally. Horizontally, HIV/AIDS demands the involvement, investment and co-operation of national departments besides health. Vertically, Government’s response to HIV/AIDS is coming up against a basic tension inherent in our inter-governmental fiscal system. This basically means that provinces are primarily responsible for social service delivery yet are overwhelmingly reliant upon nationally sourced revenue. Thus, a major issue in HIV/AIDS financing strategy is the degree of national control over provincial resource allocation and service delivery (Anonymous).

3.5. Summation of the Aforementioned Factors on the Economy:

After incorporating all the aforesaid factors, the effect of HIV/AIDS on the South African economy is, and will continue to be major. For example, by 2045-50, South Africa will have the world’s 10th-lowest life expectancy at birth. Between 2000 and 2050, life expectancy will be 27% to 41% lower than it would have been in an “AIDS-free” scenario. The population will be 44% smaller in 2050 than it would have been without the pandemic, putting excessive strain and demand on the labour force as well as human capital (Garbus, 2003:9-11).

According to a June 2003 report from the World Bank, previous studies have seriously underestimated the economic impact of the AIDS pandemic, failing to acknowledge the impact of education and parenting on the economy. When a projection model was applied to South Africa, the World Bank found that in the absence of AIDS, South Africa would have enjoyed modest, though accelerating growth of per capita income, with universal and complete education attained within three generations. With AIDS, however, if no efforts were put forth to combat the pandemic, a complete economic collapse within the same three generations was projected (Garbus, 2003:9-11). As a simple example, by 2050, per capita income per family will be half the amount it was in 1990. South Africans without access to jobs (particularly those that require high skill levels) are likely to bear the brunt of the HIV/AIDS pandemic, whereas relatively skilled workers could actually benefit from greater employment opportunities (as production becomes more skill- and capital-intensive) and higher wages (as the relative demand for skilled labour increases).

Furthermore, projections published by the World Bank in 2000 found that by 2010, South Africa’s gross domestic product will be 17% lower than it would have been in an “AIDS-free” scenario (Garbus, 2003:60). About half of this decline is attributed to shifts in current Government spending toward health expenditures, thereby increasing the budget deficit and reducing total investment. About one-third of this decline is the result of slower productivity growth and about 8% of it was attributed to AIDS mortality and its effect on population growth. The model suggested that the net effect of a higher AIDS-related mortality and slower growth rate will leave the unemployment rate largely unchanged.

The HIV/AIDS pandemic will put special pressures on the public sector. One of the most visible consequences of the pandemic will be an increase in the number of people seeking medical care: substantial proportion of the HIV/AIDS victims will be likely to turn to state hospitals for medical care (Anonymous). The financial strain on the public health sector could be severe, not only as a result of the sheer number of people seeking such care, but also because health care for AIDS patients is more expensive than for most other health conditions.

It may be argued however, that given that the labour market drivers of growth in the South African economy are based on a reliance on a relatively small proportion of the labour force (the highly skilled and skilled in selected sectors), and a capital intensive cost structure, the resultant distribution of HIV infections and mortality will not impact significantly on aggregate economic indicators (Vass, 2005:4). The adverse impact of the epidemic on the size of the population will outweigh the negative impact on real GDP (BER, 2003:12-13).

In summation, the foreseeable danger is a chain of effects that may transform themselves into a downward economic spiral (Casale, 2006:21): Lower growth could discourage investment, which could, in turn, hinder economic growth potential by reducing the availability of capital as a production factor for example.

4. Conclusion

South Africa seems destined to lag behind in responding to the pandemic. A cure has not been found as of yet, thus the next logical step (the group thinks) would be the effective management of the economic impact the pandemic will have. Ultimately this is felt in the area of healthcare and grants by the Government. In order to protect HIV/AIDS as a national priority in the budget without setting up vertical programmes that are inefficient from a health care service delivery perspective, it would be prudent to continue the focus the Government presently places on both these areas. Webb (1997:73) helps validate this perspective, stating that the pandemic can be stimulated indirectly through a decrease in health care provision.

Generally the HIV/AIDS conditional grants are working and should continue. It is also vital to understand that an improved track record occurred despite massive increases in CG allocations year to year. Another way to describe this is that national government is responding to the pandemic by rapidly increasing allocated funds, as well it should (Hickey et al, 2003:89). However, realistically, it must be understood that this places extraordinary expectations on provincial management. Improvements, however small, to the economic impact of the pandemic are likely to continue if projects and major developments are designed appropriately. International trends suggest that such programs designed address specific problems that can mitigate the impact of AIDS by simply addressing some of the most severe problems first, and with the most intensity.

As is evident from the above, there are a large number of factors that drive the HIV/AIDS pandemic and, at the same time, are impacted by it. This is true for all sectors and all levels of the economy (micro, sectoral and macro). It is important to take into account the complex relationship between socio-economic variables and HIV/AIDS when dealing with phenomena such as employment and poverty at a micro-level, as well as economic growth at a macro level.