November 25, 2004

Economic cost of AIDS set to worsen

Although data on the extent of HIV/AIDS and its impact on the South African economy vary, analysts agree that government and businesses need to take urgent action to combat the virus. Already HIV/AIDS is estimated to be reducing South Africa's growth rate by a minimum of 0.3 to 0.4 percent per annum. Forecasts of future growth show large discrepancies, however, as financial experts have created different mathematic models to calculate the consequences.
Analysts at Apt Associates came up with rather dramatic results, reckoning the country's gross domestic product (GDP) will be 17 percent lower by 2010 than it would have been without AIDS, wiping US $22 billion off the country's economy. Financial analysts at ABSA bank, in contrast, estimate the shrinkage of GDP at 9.6 percent by 2015, while ING Barings put the figure at only 2.8 percent by then. "It is difficult to quantify the impact of HIV/AIDS on the South African economy, but we have evidence that it will be impacted," said Gavin George, research fellow at the Health Economics and AIDS Research Division of the University of KwaZulu-Natal in the east-coast city of Durban.
One of the paradoxes of the HIV epidemic in sub-Saharan Africa is that in the past 10 years it has not made a huge dent on standard macroeconomic yardsticks, such as GDP. This is due, in part, to the labour situation in South Africa. In the cold logic of supply and demand, the country's labour surplus means that workers removed by AIDS can be replaced without much loss of productivity.
The supply of human capital is not everlasting, though. However high or low the prediction, the damage in terms of accumulated loss of GDP per capita will be large, according to the World Bank. This suggests that a country like South Africa could face progressive economic decline over several generations, unless it combats its AIDS epidemic more urgently. "In the absence of the epidemic there would have been the prospect of modest but accelerating growth of per capita income", according to last year's World Bank report. South Africa, where more than 20 percent of people aged 15 to 49 are infected, could lose half its per capita income in the next few generations, or within 90 years, the bank added.
HIV/AIDS causes great long-term damage to national economies, because the disease often robs children of a proper education through the death of one or both parents, and so undermines the basis of economic growth over the long haul. "We will see a ripple effect from the individual to: firstly, households; secondly, businesses and communities; and lastly, the welfare system," George said.
By mainly taking the lives of young adults, AIDS seriously weakens a country's tax base; as a result, national finances will come under increasing pressure. Less income from taxes will reduce the government's ability to finance public expenditures, including those aimed at accumulating human capital, such as education and public health services. It will also have to handle severe financial strain in other social spending categories, such as grants for AIDS orphans. To balance these, the government is likely to raise taxes.
Apart from the macroeconomic impact, AIDS will create significant costs to business. At the company level, the pandemic poses a serious threat to profitability as well as competitiveness. Firms will have to face increasing absenteeism due to illness, funeral attendances and care taking of family members. Businesses will also see rising expenditure on medical schemes and pension benefits, loss of skilled manpower leading to disruption of production, as well as increases in training, recruitment and personnel turnover costs. This will result in declining company performance and a rise in market wages for people with scarce skills.
Old Mutual Healthcare, for example, estimated that additional healthcare costs as a result of HIV/AIDS could reach $3.8 billion per year by 2009.
According to the South African Bureau of Economic Research (BER), AIDS deaths will reduce the number of consumers, which would have an effect on total consumption expenditure. Companies will have to raise prices to cover higher costs. By 2010 life expectancy will be 43 years, 17 years less than it would have been without AIDS. Analysts estimate the South African labour force will shrink accordingly, by up to 23.5 percent by 2015.
Considering that the epidemic in South Africa might still be at an early stage of development, the high tide of related illnesses and deaths is yet to be felt. Businesses urgently need to take action to fight the pandemic. "A lot of firms are already hit by HIV/AIDS," said George. To what degree enterprises are affected varies between business sectors. The mining sector has been worst hit by the pandemic, with an AIDS prevalence rate among its workforce of 25 percent, closely followed by manufacturing with a prevalence rate of up to 19 percent. Construction, retail and wholesale count as medium- to low-risk sectors.
The effects of AIDS on businesses will also depend on a company's location. In provinces with high prevalence rates, such as KwaZulu-Natal and Gauteng, close to 40 percent of firms indicated that AIDS already had a negative impact on their profits, according to BER. In the Western Cape and Eastern Cape, the numbers were 25 percent and 27 percent respectively. The negative impact of AIDS on commerce is also likely to discourage investment - especially inward foreign direct investment. "HIV is making business much more expensive," said George. Since foreign investors were interested in investing with as little risk as possible, "they might potentially move out of the country," he added. HIV/AIDS is a risk of doing business in South Africa, right next to asset security, crime and exchange rate volatility, besides political and infrastructural risk.
Despite gloomy predictions, South African companies have reacted slowly to the pandemic. Only about a quarter of the country's businesses - mainly large corporations - have workplace policies in place. Small and medium-sized firms often the lack human and financial resources to implement an AIDS plan. Large, medium and small enterprises therefore needed to pool resources in a unified response to fighting the pandemic, suggested George. He noted that the South African government failed to provide "real leadership" to businesses, and needed to implement a comprehensive strategy for firms throughout the country. Government should, for example, offer tax relief to firms providing free treatment to their employees, to make the implementation of AIDS workplace programmes more attractive. (IRIN)


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