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Aggregate Effects of AIDS on Development

By Raül Santaeulàlia-llopis, Dirk Krueger, All Wright and Hans-peter Kohler


In this paper I study the consequences of the AIDS epidemic for economic development. To this purpose I build a population model that keeps track of the demographic transition by age-specific population groups relating the age distribution of the population of each period to the preceding one via a fertility process, a mortality process and an aging process. I integrate this population model into a standard theory of economic development that determines the income per capita path along the process of industrialization- a transition that structurally shifts capital and labor from a Malthusian-agricultural sector to a neoclassical-industrial sector. This way, I provide a tight structural relationship between the distribution of the population across age groups and the stage of economic development- in terms of income per capita and agricultural share of output. Then, I use this population model to consistently identify 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 also (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. I am intellectually indebted to my advisor José-Víctor Ríos-Rull. I thank Frank Schorfheide, Urban Jermann

Year: 2007
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