| Abstract: | Primarily a disease of young adults, AIDS imposes economic coststhat could be devastatingly high in the long run by underminingthe transmission of human capital—the main driver of long-runeconomic growth—across generations. AIDS makes it harderfor victims’ children to obtain an education and deprivesthem of the love, nurturing, and life skills that parents provide.These children will in turn find it difficult to educate theirchildren, and so on. An overlapping generations model is usedto show that an otherwise growing economy could decline to alow-level subsistence equilibrium if hit with an AIDS-type increasein premature adult mortality. Calibrating the model for SouthAfrica, where the HIV prevalence rate is over 20 percent, simulationsreveal that the economy could shrink to half its current sizein about four generations in the absence of intervention. Programsto combat the disease and to support needy families could avertsuch a collapse, but they imply a fiscal burden of about 4 percentof GDP. |
