Differentials considerations for the caribbean


PART III. ECONOMIC IMPACT OF AIDS



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PART III. ECONOMIC IMPACT OF AIDS
GENERAL CONSIDERATIONS
AIDS creates severe economic impacts. It is different from most other diseases because it strikes people and takes away life in the most productive age groups and is essentially 100 percent fatal. Premature adult mortality is assumed to occur about a decade into full adulthood, this being the median time from infection to death in the absence of treatment with antiretroviral drugs.63/ The economic effects will vary according to the severity of the AIDS epidemic and the structure of the individual and his/her household, the community and the national economy.
The two major overarching effects are a reduction in the labor supply due to the loss of life and human energy and increased costs to deal with such losses. Grosso modo:
Labor supply=


  • The loss of young adults in their most productive years will affect overall economic output.

  • Labor supply reduction is multidimensional – it cuts across gender, class, ethnicity and race.

Costs =



  • The direct costs of AIDS include expenditures for medical care, drugs, and funeral expenses.

  • Indirect costs include lost time due to illness, recruitment and training costs to replace workers, and care for orphans. Dependency rates change.

  • If costs are financed out of savings, then the reduction in investment could lead to a significant reduction in economic growth.

With the aforementioned overarching framework in mind we begin by listing some more specific primary effects of morbidity and mortality in the age groups that AIDS typically strikes, namely young and prime-aged adults, who, ceteris paribus, would otherwise be economically active people in the labor market. This order of losses and costs is along the following lines:




  1. Morbidity reduces productivity on the job or results in outright absenteeism. If the worker dies, his or her skills and experience are lost.




  1. Firms and the government lose trained workers on both counts and must replace them.




  1. Substantial expenditure, public and private alike, may be required to treat and care for those who become sick.




  1. Savings are also diverted out of net investment in physical and human capital into the treatment and replacement of workers who fall sick and die.




  1. Lifetime family income is greatly reduced, and with it the family’s means to invest.




  1. Children lose the love, care, guidance, and knowledge of one or both parents, which plausibly weakens transmission of intergenerational knowledge and capacity.




  1. The tax base shrinks.




  1. Collateralization in credit markets becomes more difficult, and as a consequence credit markets function less well.


9. Social cohesion and social capital decline.64/


IMPACT ON HOUSEHOLDS AND EXTENDED FAMILIES
There is no tabulating the loss of a broken heart as AIDS ravages the afflicted individual and the other members of the household. Households and families bear most of the burden of HIV/AIDS because they are the primary units for coping with the disease and its consequences. Studies show that if the infected person is the breadwinner, the family suffers financially as income declines, earnings are lost and increased expenditure for medical care accrues.
HIV/AIDS affects the income of the affected households not only through sickness and death of household members, but also as the time previously devoted to income-generating activities by other household members must be reallocated to the care of the sick member. Other household members may also be obliged to take time off from other productive activities to care for sick relatives. Such time reallocation points to obligatory “backward and forward linkages” in the network of household members who in some form or fashion support the losses associated with the disease.
The magnitude of impact of HIV/AIDS on the income of an affected worker depends on the source of that income. If the worker, for example, is self-employed or is paid is paid according to his or her productivity (for example, a tea picker), income declines immediately as the worker’s health (and thus, productivity) starts to deteriorate. If, on the other hand, the worker receives a fixed salary (as is typical in the public sector and parts of the private formal sector), the income loss is not directly tied to the decline in productivity, and, as absenteeism increases, the loss is mitigated through sick leave and, possibly, a disability pension.
The overall impact of the blow dealt by AIDS depends on the household’s socio-economic characteristics. During the long period of illness, and after the death of the victim, lack of income and the cost of care can force households to spend their savings, sell their productive assets and borrow money. In assessing the impact of HIV/AIDS on income, the household’s living standard deteriorates as time is reallocated, roles are changed among household members and expenditure in financial resources and energy are spent.
Direct expenditure of on AIDS-related illnesses for example, cover three major cost categories: (i) average drug cost per capita, (ii) the costs of HIV and other related tests and (iii) the cost of hospitalization per patient. Households with low income or a few assets may be in a worse position to cope with income and expenditure shocks associated with HIV/AIDS. There might also likely be different economic capacity to deal with the individual loss in the rural as opposed to the urban setting, especially for those drawing their income from the formal sector.
HIV/AIDS results in increased demand for health-related goods and services. There is a parallel shift of events taking place in the household once the HIV/AIDS is present: the household income tends to shrink at the same time this demand is rising, thus, the household is forced to make tradeoffs and cut other expenditures or sell off some of its assets. Categories of expenditure such as electricity and clothing are often sacrificed. This finding is consistent with a World Bank study, which found that households affected by HIV/AIDS lowered their overall expenditures but that the share of medical expenditure in total rose (World Bank, 1999).65/
In the absence of any form of social security or funeral insurance, the cost of funerals is another important household expenditure. Some authors suggest that funeral expenses are, on average, equivalent to four months’ salary in some parts of the world. There are reports that for low-income households in Soweto, South Africa, for example, funerals hover around US$1,400, or 3.5 times the average monthly income.66/
In 1989 it was reported that the cost of a single hospitalization or funeral service in Haiti, for example was 40-60 percent of the per capita income. Furthermore, a direct consequence of the large number of HIV associated deaths in adults is the ever growing number of AIDS orphans in a country that is saddled with another economic burden since there are few orphanages to place them. In the absence of available social services the majority of orphans in Haiti are left with the member of their family or with friends of the family. Many children “tumble” onto the streets and become street children and therefore, run a greater risk of acquiring HIV.67/

IMPACT ON THE LABOR FORCE AND ON PRIVATE SECTOR BUSINESSES
The epidemic cuts the supply of labor and threatens the livelihoods of the worker and the survival of the workplace. By 2010, for example, Haiti will have lost more than 10% of its labor force (ILO, 2004).68/ HIV/AIDS reduces the stock of skills and experience of the labor force and this loss in human capital makes it more difficult to attain goals for poverty eradication and sustainable development (International Labor Organization, 2004).
The business sector is particularly vulnerable to the impact of the HIV/AIDS epidemic, since so many victims of AIDS are working age. The illness that precedes AIDS-related deaths reduces the productivity of otherwise economically active men and women. Businesses face increased costs for health and death benefits and for training new workers. Businesses are forced to divert income and savings, discourage investment and restrict demand.
The following Chart 2 illustrates how impacted areas hit by the AIDS epidemic undermines enterprise development: the combined costs reduce profitability, with a knock-on impact on the national economy.

Chart 2


AIDS epidemic undermines enterprise development


Increased absenteeism




Increased staff turnover




Loss of skills




Loss of tacit knowledge




Declining morale



















Medical assistance



Retirement funds

Health and Safety

Insurance cover

Funeral costs

Increased costs

Increasing demands for training and recruitment

Declining
re-investment

Declining markets, labor pool, suppliers

Declining profits

Declining reliability

HIV/AIDS in the country

Declining

intellectual capital

Declining productivity

Reduced foreign direct investment
Source: http://data.unaids.org/Publications/IRC-pub06/jc0876-partnership_lac_en.pdf
Using commerce and industry as a generic example, we understand that business organizations aim to make a profit. At its simplest, profit is made by selling goods and services for more than the cost of production. The cost of producing goods is a function of inputs including labor, materials and utilities (and technology). HIV/AIDS raises costs, reduces the productivity of individual workers and alters the firm’s operating environment through:


  • Increased absenteeism, the result of employee ill health or because staff, particularly women, take time off to care for sick members of their families or because funeral ceremonies are frequent and time-consuming;




  • Falling productivity: workers whose physical or emotional health is failing will be less productive and unable to carry out more demanding jobs;




  • Employees who retire on medical grounds or who die have to be replaced and their replacements may be less skilled and experienced;




  • Recruitment and training of replacement workers incurs costs for an organization;







  • As skilled workers become scarcer, wages rates may increase, and

  • The business environment may change with investors reluctant to commit funds if they think AIDS and its impacts will compromise their investments and returns.69/



IMPACT ON PRODUCTIVITY
The productivity consequence of the direct impact on the health of the household will be seen in increased absenteeism, and possibly a less than vigorous approach by workers who are household victims to take on the tasks confronting them, partly because of the physical effect of the illness and partly for psychological reasons.
The productivity consequence of HIV/AIDS impact on the firm presents an additional problem. When employees become sick, they leave; are medically retired or are dismissed before they possibly die. It is not in the interests of an employer to retain workers who are no longer able to perform and who are chronically sick. How can the organization know the costs it bore during a period of illness and, as a result of the death that should be ascribed to AIDS? How can an organization gain a picture of its potential liabilities and the long-term implications of the epidemic for its operations?
Without answering these brain-teasing questions now, suffice it to say, on the level of the firm, the impact of AIDS may have a long-term bearing on human resources and thus, a knock-on effect on productivity. For example, increased morbidity and mortality have an adverse impact on a firm’s institutional memory because time-worn staff must leave and may have to be replaced while remaining staff is reassigned. Institutional memory either disappears or is stunted resulting in potentially under par or “deficient” productivity.
Productivity is necessary for output which in turn, is necessary for national economic growth to achieve national development. It is however, not easy to understand the macroeconomic impact caused by HIV/AIDS because the epidemic is a long-wave event, and so are the economic trends which reflect output. It is apt to note that GDP (gross domestic product) and GNP (gross national product) are economic measures but, they have limitations since life and the quality of life are more than raw economic measurables that calculate levels of national development.70/ At best, understanding the macro­economic variables may be challenging and are often easily understood through econometric models this Paper will not broach.
Nonetheless, using some broad macroeconomic variables, estimates of the projected economic impact of HIV and AIDS in the Caribbean were conducted for Guyana and Suriname. The key results are summarized in Table 6.
Table 6
Projected Impact of HIV/AIDS on Overall Labor Supply and Employment in
Selected Sectors in Suriname and Guyana by 2015


Macro economic variables

Extent of

Impact by 2015 (%)




Suriname

Guyana

GDP

-1.18

-2.73

Savings

-1.34

-2.81

Investment

-1.47

-3.74

Employment

-0.02

-0.02

Labor supply

-0.02

-0.01

Source: La Foucade, et al, June 2004
The following Table 7 presents the results of the macroeconomic impact of HIV on key variables in Trinidad and Tobago and Jamaica, based on adult projections. It must be noted that these impact measures are based only on low case scenario projections. The fraction of persons that are likely to contract the disease was increased on a sustained basis by 20% over the period 1997-2005. This shock to the system was meant to capture the increase in the incidence of HIV cases in both Jamaica and Trinidad and Tobago. With an increase in the incidence of HIV some scholars sustain there are noted contractions in the macroeconomic variables.71/ It follows that there is the potential for long-term growth to be affected.

Table 7
Macro economic impact on key variables in Trinidad and Tobago and Jamaica


(low case scenarios projections in percentages)


Impact variables

Trinidad and Tobago

Jamaica

Gross domestic product (GDP)

-4.2

-6.4

Savings

-10.3

-23.5

Investment

-15.6

-17.4

Employment in agriculture

-3.5

-5.2

Employment in manufacturing

-4.6

-4.1

Employment in services

-6.7

-8.2

Labor supply

-5.2

-7.3

HIV/AIDS expenditure

+25.5

+35.4

Source: Nicholls, McLean, Theodore, Henry, Camara and team, p.14.
Gross Domestic Product in 2005, in Jamaica and Trinidad and Tobago declined on average by 6.4 and 4.2 percent, respectively. Translated into 1997 terms, in the case of Jamaica this would be close to $US 200m or $80 per capita. For Trinidad and Tobago corresponding figures are $US 240 m or $US 184 per capita.72/ Although there were declines in employment, the model simulations demonstrate that employment in the service categories are more affected by rising incidence of the disease than employment in either agriculture or services.
The negative impact on savings in particular, in Jamaica is significant and twice the same figure in Trinidad and Tobago. When examined more closely this indicates that (1) the level of domestic savings in Jamaica may prove inadequate to finance the expenditures on HIV and (2) findings may result in negative growth (fall in the level of GDP). Thus, HIV/AIDS has the ability to strike at the heart of the society’s development by striking at productivity.
Figure 2 below highlights the link between HIV/AIDS and productivity.
Figure 2
The Link between HIV/AIDS and Productivity


GDP

Source: Foucade, Scott, Theodore and Beharry, 2004.



The diagram in Figure 2 portrays a simple, but frightening story. The basic story is that it is the quantity and quality of a society’s pool of human resources that will cause the national income or GDP to grow, creating the potential for economic and human development. When HIV/AIDS makes its presence felt as it reverberates through the society, it turns out that it is the same resource pool with the potential for development that will be called upon to be in the vanguard of the fight against HIV/AIDS --- personnel in education, health personnel, management personnel and similar workers both in households and in the labor market. The diagram reflects the previous statement that “HIV/AIDS has the ability to strike at the heart of society’s development.”
While HIV/AIDS proceeds to deliver a frontal attack upon the society, the disease simultaneously undermines the society’s capability for future resistance against it. It is almost as if HIV/AIDS is an “intelligent-agent” epidemic that gnaws away at the scaffolding of human capital. The broken arrows on the right of the diagram portray this “intelligence” as they emerge from the ever-changing virus, depicted with dashes.
A society’s future depends on its human capital. There are some dynamic elements at work in the HIV/AIDS “human capital” story through several channels. The levels of human capital and premature adult mortality in the present generation play a key role in determining the level of human capital attained in the next generation. This implies that if current levels of human capital are low (premature death of parents) and are being hard hit by HIV/AIDS, then (1) future generations may start to prematurely stay away from school to help victims at home or drop out altogether from the educational stream and in so doing, (2) reduce family and personal investments in schooling, (3) thereby stunting future prospects to create expected returns to education. Premature adult mortality may give rise to a poverty trap, with an increasing share of the population now mired in poverty and facing little or no prospect of upward mobility or capital accumulation.

IMPACT ON THE PUBLIC SECTOR
HIV/AIDS causes disruptions to government services in ways similar to those discussed and shown above for private sector enterprises. As public servants fall ill and die, the efficiency of government agencies declines because of falling productivity and disruptions related to increasing attrition rates. These disruptions can be particularly severe if employees are allowed extended sick leave, or if long lags intervene between advertising of a position and the hiring of a replacement. Disruptions can be particularly severe for decentralized government services, such as local education and health services. If a given community receives these services from only one or a few public servants, illnesses or death among them can theoretically cause a prolonged local disruption in these services.
The impact of HIV/AIDS on the government’s personnel costs, through increased medical and death-related benefits and increased training and recruitment costs can be steep. These effects are similar to those discussed above in the context of the private sector and need not be further discussed here.

ADDED IMPACT ON WOMEN
Discrimination and unequal treatment further limit women’s income-earning possibilities and help perpetuate inequality between men and women with or without AIDS. Women who have lost partners to AIDS or who have been abandoned because they are HIV-positive may be deprived of financial security and economic opportunities. Under these circumstances, HIV/AIDS would seem to fuel a process of “pauperization” among women who become destitute and who may then be forced to resort to sex for survival or migrate to find work. Theses options present a double jeopardy since migration has inherent dangers for women traveling on their own and sex work presents a relatively high level of susceptibility and occupational vulnerability that easily feeds into the HIV/AIDS cycle.
Women’s double burden is intensified when a household is affected by HIV because she may have to provide care for the victim in addition to maintaining or boosting household income. Such a load can lead to physical and emotional exhaustion, thus disrupting the woman’s overall possibility to provide the support structure with which she is newly charged.
Women who are the major caretakers within the family in the Caribbean carry the primary responsibility for the health and well-being of future generations. When a woman becomes infected with HIV/AIDS the results are catastrophic because it means she can no longer care for herself or her family. The threats are at least twofold:


  • The danger for the next generation looms large because the statistics show that one in every four children born to an HIV-infected mother runs the risk of being infected and within recent years the numbers of AIDS orphans have increased within the English-speaking Caribbean.73/




  • Women endlessly advocate and encourage the attainment of higher education for their children. The loss of this strong influence in the Caribbean family has the potential to significantly impact future generation’s income earning capacity and independence if educational objectives are not met by children in an AIDS-afflicted home.



THE UNAFFORDABLE COST OF POLICY INACTION
Few countries can afford the financial cost of inaction. In the hypothetical case of a developing country with a per capita income of US$300, the budgetary cost of implementing a national HIV/AIDS program amounts to 1.0 percent of GDP when HIV prevalence rate is less than 5 percent. If the implementation is delayed so that the HIV prevalence rate reaches 20 percent of the population, the budgetary cost amounts to 3.3 percent of GDP. This cost excludes the provision of antiretroviral drugs.74/
As we have highlighted, there are other costs the figures of which are difficult, if not impossible to tabulate: the emotional shock of receiving a seropositive diagnosis and the emotional pain of such bad news; the demands of unremunerated long-term emotional support for individuals facing not only life-threatening illness but daily battles with nausea, fatigue, and other common drug side-effects; with depression and suicidal thoughts; the heartfelt loss of loved ones, the challenge of stigma and social exclusion and the inevitable potential loss of human capital development, the cost of which can be tallied if one calculates putative long term educational and knowledge-building75/ losses for individuals and societies. Care providers and institutions need support, too for the energy the expend in the fight against HIV/AIDS.
There are myriad untabulated but costly challenges to maintaining good health, particularly in setting where survival alone is the daily fare. Along with the cost of drug therapy, the provision of mental health must also be introduced into the formula. Against this backdrop it behooves policy makers to mainstream HIV/AIDS policy options into all levels of the economy.

THE COST OF CONTINUED POLICY ACTION
Because AIDS is an infectious disease with chronic complications the response to the crisis necessitates a comprehensive and sustainable approach: comprehensive in the sense that it will have to address all the dimensions of the epidemic, and sustainable in that it will be essential to continuously support the necessary behavior modifications over an extended period of time.
The comprehensive approach will involve high costs: the cost of time on its merits and in terms of opportunity cost, the cost of patience, the cost of medical treatment of patients, which includes the pharmaceutical cost associated with response and possibly the cost of research and development to keep up with the disease and its opportunistic illnesses as they change over time.
Here we must refer to “resource requirements” and to financing the implications of responding to HIV/AIDS and its costs. In theory there are essentially four potential sources of continued financing of HIV/AIDS responses:


  • Domestic fiscal revenues;

  • Domestic private incomes;

  • External bilateral assistance and,

  • External multilateral assistance.


The first two sources would have to depend on the national income of the respective Caribbean countries. With a year 2000 estimate offered by the World Bank national income was reported at US$ 49.8 billion for the combined national income of the countries of the wider Caribbean – CARICOM/CARIFORUM members and CARICOM Associates,76/ that is excluding Aruba, Puerto Rico, Cuba and the United States Virgin Islands. When the latter four countries are included the figure skyrockets to US $ 98.4 billion.77/
Based on preliminary figures produced jointly by the World Bank and the Health Economic Unit/University of the West Indies in 2000, the annual cost of mounting a full-scale response to the epidemic in the CARICOM/CARIFORUM region (excluding Puerto Rico and Aruba) would be between US$ 275 million and US $ 550 million depending on assumptions made about ARV drugs. Using the lower estimate, this cost has to be seen, albeit in “old dollars”, against the estimated annual combined national income of close to US$ 50 billion. Since one percent of this combined income would be US$ 500 million, the cost of the HIV/AIDS response would be significantly less than one percent of the region’s combined income. There is therefore a strong prima-facie case for advocating the financial feasibility of a continued response to combating HIV/AIDS, notwithstanding adjustments for the cost of 2006/2007 dollars.78/
While the 200 figures make continued response to the epidemic a necessary challenge that must be pursued as this writing takes place, there are at least three other economic considerations that must be born in mind in respect of national income potential to contribute to the fight against HIV/AIDS in the Caribbean.


  • The extent of income inequality across the region makes it such that consideration must be taken to link the financing of HIV/AIDS to resource pooling mechanisms so that no one national response program is under-financed since this could impose additional burdens elsewhere in the region.




  • The even greater income inequality within countries such that universal access to quality health services may have to consider domestic financing reforms such as some mechanism of social financing, that is public revenues or social security that ensure universal access to ARV treatment for all who need it.




  • The almost near intractability of resource mobilization. When countries experience fiscal deficit pubic revenues are less available for responding to HIV/AIDS so in the light of fiscal slippage, countries would have to make tax collection more efficient to make HIV/AIDS funding requirements more within reach.

It is understood that as micro-states, Caribbean countries often have had to take steps to mobilize external assistance in the fight against HIV/AIDS. Given the urgency of the resources needed, it is necessary to continue efforts to put and keep in place effective domestic resource mobilization strategies as well as constantly reexamine both the expenditure and revenue collection facets of the fiscal systems.


Moving ahead, all that is left to be said is that the economics of AIDS has many more facets that need to be explored so that the essential elements of a regional and global response can work hand in hand and efforts to keep AIDS treatment for the hard hit region of the Caribbean do not contract.


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