Aggregate Effect of AIDS on Development

Raul Santaeulalia-Llopis ()

No 533, 2008 Meeting Papers from Society for Economic Dynamics

Abstract: To explore the quantitative implications that AIDS has for the development path of the Sub- Saharan African economies, I extend a standard theory of economic development that reproduces the process of industrialization, Hansen and Prescott (2002), with a population model that relates the age distribution of the population of each period to the preceding one via a fertility process, a mortality process and an aging process. This population process captures the main channels through which AIDS, raising mortality rates of young adults and lowering fertility rates, affects populations over time: (i) reshapes the age distribution of the population, thinning the ranks of working-age groups (the share of children and old adults per worker raises by as much as 20-25% in highly infected countries), (ii) reduces population growth (by as much as .08% per percentage point of HIV prevalence), and (iii) reduces life expectancy (by as much as 15-20 years). In addition, AIDS (iv) reduces the individual labor efficiency of the sick with an aggregate loss of 0.3% per percentage point of HIV prevalence. When I incorporate the AIDS epidemic as in (i)-(iv) into a model economy calibrated to an African country unaffected by AIDS, I find that the AIDS epidemic reduces per capita income by as much as 12% at the peak of the epidemic. I find also that the AIDS epidemic slows down the transition from agriculture to industry by about one century for the most highly infected countries.

Date: 2008
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