Economic Impact of HIV/AIDS

Economic Impact of HIV/AIDS Stakeholder Workshop March 2, 2007 Structure of Presentation Review of Terms of Reference Assessment of BIDPA (2000) Model Macroeconomic Models Firm/industry review Fiscal impact Household/poverty impact Conclusions 1

Terms of Reference Terms of Reference Review and update the BIDPA (2000)macroeconomic impact study, in particular: the methodology, assumptions and choice of models; evaluate the findings of the study vis a vis subsequent trends, and ascertain the predictive capabilities and suitability of the models chosen 2

Terms of Reference Analyse the likely impact of HIV/AIDS on the Botswana economy to 2021 using quantitative models; contrast the findings with those of BIDPA (2000) Estimate the trend paths of key economic variables under alternative HIV/AIDS scenarios, including the without-aids scenario, specifically: economic growth, savings, investment, human resource capacity, labour supply, productivity, competitiveness and poverty Terms of Reference Estimate the disaggregated current and future costs, direct and indirect, to the Government and the economy, of HIV/AIDS, with implications for the Government budget. Reconcile model predictions of the micro and macro level impacts of HIV/AIDS. This will involve estimating the household and sectoral impacts of HIV/AIDS. 3

Terms of Reference Determine what policy levers the Government has at its disposal to mitigate the economic impact of HIV/AIDS, the extent to which such levers have been used and to what effect. Investigate the strategies that firms have employed to protect their businesses from HIV/AIDS and the extent to which they have been successful in this regard. Review of BIDPA Study (2000) 4

Review of BIDPA Study Macro Model Structure BIDPA model aggregated growth function, formal & informal sectors, skilled & unskilled labour Accommodates with & without AIDS scenarios Relevant parameters (infection rates, productivity, labour force growth) can vary Calibrated to 1995/96 actual data, simulations to 2021 based on demographic projections Projections of real GDP growth; per capita incomes; wages; employment Household (poverty) impact using HIES data Diagram of Model Structure Capital Formal Sector Informal Sector Skilled Labour Unskilled Labour Population & AIDS OUTPUT 5

Survey of HIV & AIDS Economic Impact Studies Model Types Type of Model Econometric estimation Aggregate growth model Macro-econometric model Computable general equilibrium No. 2 5 3 3 Review of BIDPA Study Methodology was sound aggregate growth model is most widely used; notably IMF studies on Botswana, 2001 & 2004, also Malawi & Tanzania Model is transparent, data requirements modest, maths & programming tractable Assumptions used were based on best available data at the time, although subsequent developments not always as assumed BIDPA study has been widely referenced and quoted Household impact analysis (simulation based on HIES data): BIDPA study was first of its kind Used in other studies subsequently 6

Review of BIDPA Study Other methodologies also useful where data is available Disaggregated approach can be useful more detailed simulation of economic changes CGE models used for SA, Tanzania, Zambia Macro-econometric models in SA Actual Outturn vs BIDPA (2000) Projections & Assumptions (period averages) 1995/6-2000/01-2000/01 2005/06 Economic Growth BIDPA 3.1% 2.9% Actual (non-mining) 5.9% 4.7% Actual (non-mining private sector) 5.4% 3.7% GDP per capita (growth) BIDPA 1.3% 1.1% Actual 2.8% 3.8% Population Growth BIDPA 2.5% 0.8% Actual (CSO) 2.4% 0.9% Actual (CARe) 2.5% 1.7% Labour Force Participation Rate BIDPA 48.5% 48.3% Actual 49.8% 56.5%* Investment (% GDP) BIDPA 25% 25% Actual 30% 21% Productivity (TFP) Growth BIDPA 0.25% 0.25% Actual 1.3%* HIV prevalence (15-64 yrs, %) BIDPA 31% 30% Actual 24%* * different time period 7

Summary of Model vs Outcomes Average GDP growth over 2001-2005 higher than predicted However, recent growth of nonmining private sector close to predicted rates % 9 8 7 6 5 4 3 2 1 0 '97/98 '99/00 '01/02 '03/04 '05/06 Summary of Model vs Outcomes Population growth higher than predicted (+) Higher labour force participation (+) Investment close to predicted value HIV prevalence lower than forecast (+) Productivity (TFP) higher (+) ART available 8

Choice of Macroeconomic Modelling Approaches Channels of Potential Economic Impact Morbidity Productivity (sickness, time off) Expenditure (health care, training) Savings (diversion of incomes) Investment (uncertainty, profits, savings) Mortality Smaller population and labour force Changed age structure (experience) Loss of skills 9

Macro Modelling Approaches Updating of BIDPA model Calibrate to 2001 (from 1996) with new economic data Incorporate 2006 demographic projections Incorporate with ART & no ART scenarios along with No AIDS counterfactual Pay more attention to costs of HIV/AIDS treatment, impact on savings, investment & growth Impact of ART on labour force, productivity Improve modelling of productivity growth Use 2002/03 HIES data, but no new labour force data (since 1996) Macro Modelling Approaches Other macro modelling approaches Macro-econometric model needs pre-existing model not available in Botswana model building a long and complex process CGE model feasible to build CGE for this project well-suited to analysis of HIV/AIDS impact 10

Basis of CGE Model As with aggregate growth model, also works by simulating behaviour of economy More detailed economic structure disaggregated by sector, labour category, household income group Can model many interaction channels simultaneously Based on Social Accounting Matrix (SAM) Very demanding data requirements Can be linked with HIES for simulations Key Findings Macroeconomic Impact 11

Simulated GDP Growth Rates, 2002-2021 (Fig. 5-8) 6% 5% 4% 3% 2% 1% 0% 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 No AIDS AIDS-ART AIDS - No ART Simulated Real GDP per capita 2002-2021 (Fig. 5-7) 19,000 18,000 17,000 16,000 15,000 14,000 13,000 12,000 11,000 10,000 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 No AIDS AIDS-ART AIDS - No ART 12

Simulated Underemployment, 2002-2021 (Fig. 5-9) 36% 34% 32% 30% 28% 26% 24% 22% 20% 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 No AIDS AIDS-ART AIDS - No ART Contributions to GDP Growth No-AIDS vs AIDS with ART TFP, 22% Capital, 48% Skilled, 21% Unskilled, 9% 13

Sectoral Impact Avg. growth 2003-21 (%) 8 7 6 5 4 3 2 1 0 Labour intensive sectors dependent on less-skilled workers most affected Agr Mine Mfg W&E Constr Trade NO AIDS AIDS ART H&R Transp Fin serv Bus serv Oth serv Pub Adm E & H Key Findings Household Impact 14

Household (Poverty) Impact Wide range of possible impacts on HH Income and Expenditure Direct and Indirect Channels Temporary and Permanent Effects Possible channels Costs of medical provision Funeral costs Changed household composition (fewer or more members; income-earners vs dependents) Loss of income as breadwinners fall sick or die Changed employment opportunities Impact on general wage levels Government orphan support Household (Poverty) Impact Modelled through: Simulating impacts on HIES source data over 10 years (as per BIDPA study) CGE modelling to 2021 (new) 15

Simulated Poverty Impact (HIES) Poverty Headcount (HH PDL) 60% 50% 40% 30% 20% 10% 0% Gab FT Oth urb R SE R NE R NW R SW Nat Without AIDS AIDS with ART Simulated Poverty Impact to 2021 (CGE) Poverty Headcount ($ a day, %) 25 24 23 22 21 20 19 18 2003 '05 '07 '09 '11 '13 '15 '17 '19 '21 With AIDS NOAIDS 16

Household (Poverty) Impact HIV & AIDS has clear negative impact on poverty Poverty headcount up to 3% higher due to HIV/AIDS ART provision offsets this by 1/3 to 1/2. Orphan welfare provision also has significant poverty benefits Key Findings Firm-level Survey 17

Firm-level Survey - Introduction 25 firms were interviewed in different sectors Survey was not intended to be nationally representative but was sufficient to bring out the salient issues about HIV/AIDS General Results Generally a bigger loss of unskilled workers due to illness and death than skilled workers 75% of firms reported negative impact of HIV & AIDS on output and productivity Most firms (56%) responded that HIV/AIDS has no significant impact on investment: other factors affecting profitability more important some firms reported delays in expansion and diversion of spending Difference in impact across sectors level of skills a major factor Sectoral impact similar to SA Firms reported a reduced effect of the disease due to the availability of ARV since 2001/2002, esp. for skilled workers. 18

Firms Responses Firms have been innovative in their responses, especially those that have been impacted most by the disease: training more workers than needed; keeping additional workers on standby. over-employ for critical positions multi-skilling mechanisation more overtime temporary staff Although output could be maintained, training costs increased significantly Response in training by skill level 80 70 60 % of skilled workers 50 40 30 20 10 0 No training response Train more multi-skilling Total 19

Response in hiring by skill level 80 70 60 % of skilled workers 50 40 30 20 10 0 No response Hire more Hiring temporary workers Total Severity of Impact by Sector (Least) - Severity - (Most) Construction Manufacturing Mining Service Financial Retail 0 20 40 60 80 100 % of skilled workers 20

Fiscal Impact of HIV/AIDS Cost Implications ART Hospital in-patient Ambulatory Orphan care Home-based care Prevention Programme management Old age pension 21

Projected Total Number of adults and children on ART 160 140 120 thousand 100 80 60 40 20 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 ART Best estimate ART 10%lower ART 10%higher Hospital bed needs for HIV and AIDS per year 2,500 2,000 1,500 1,000 500 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 No ART ART Best estimate ART 10% lower ART 10% higher 22

Projected Number of Total deaths per year 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 No AIDS No ART ART Best estimate ART Best estimate less 10% Projected Costs with ART 1,800 P million (real, 2004/05 prices) 1,600 1,400 1,200 1,000 800 600 400 200 0 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 OAP OVC Other Prevention HBC ART Amb exc ART In-patient 23

Projected ART costs P million (real, 2004/05 prices) 700 600 500 400 300 200 100 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 ART Best estimate ART 10% higher ART 10% lower Actual from Dev expenditure Projected Costs selected interventions No ART P million (real, 2004/05 prices) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 OVC Prog. mgt. Prev HBC ART Amb exc. ART In-patient 24

Total costs by scenario (P million) 1,800 1,600 P million (2004/05 prices) 1,400 1,200 1,000 800 600 400 200 0 2001 2002 2003 2004 2005 2006 2007 No ART 2008 2009 2010 ART best estimate 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Total costs by scenario (% of GDP and Gov Exp) 9% 8% % 7% 6% 5% 4% 3% 2% 1% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 No ART (% GDP) ART (% GDP) No ART (% Gov Exp) ART (% Gov Exp) 25

Conclusions, Policy Implications and Recommendations Macroeconomic Implications Real GDP growth reduced by 1.5% - 2% a year without ART Economy will be up to one-third smaller by 2021 due to HIV & AIDS Result of reduced labour force growth, younger LF, reduced productivity & investment GDP/capita growth 0.5%-1% lower 26

Macroeconomic Implications ART provision adds 0.4% - 0.8% to average GDP growth (cf. no-art) Eliminates apprx one-third of negative growth impact Economy still 20%-25% smaller by 2021 Avg. incomes growth higher with ART In both scenarios investment channel is most important Labour Force & Employment Reduced labour supply and labour demand so overall effect uncertain Models suggest that demand effects dominate Leading to lower emloyment and lower wages with HIV & AIDS 27

Macroeconomic Recommendations Efforts to improve economic efficiency and reduce costs crucial to offset negative HIV & AIDS impacts Implement measures supportive of private sector investment & economic diversification Skills development, shared training costs Make it easier for firms to recruit citizens and non-citizens Poverty reduction and social welfare policies crucial to minimise poverty impact Fiscal Implications HIV & AIDS is having a major impact on govt budget approx 6% of govt spending Cost will rise by 60% in real terms by 2021, peaking at 8% of spending/3% of GDP ART drugs largest single component (40% of total) No-ART scenario costs are lower, but ART savings offset by higher other costs (health, OVC, HBC etc.) Economic growth and govt revenues would be lower in No-ART scenario Hence incremental ART (as % of GDP and govt spending) costs are small 28

Fiscal Recommendations Costs are manageable but large & imply fiscal adjustments if budget is to be sustainable Fully funding HIV & AIDS costs from budget deficits not feasible needs trade-offs & cuts in spending elsewhere Prioritising of expenditures crucial to make cuts in lower priority areas Focus on cutting costs of HIV & AIDS programmes e.g. generics, lower cost services Work with donors to secure resources to maintain programme Fiscal Recommendations Consistent data a problem spread across many spending departments Need for NASA/NAA NSF costings rough and ready Need for more accurate and better documented NSF costings to: Allow more accurate assessment of resource needs Enable updating using consistent methods Facilitate consensus approach Engage meaningfully with donors 29

Thank You 30