Economics of HIV and AIDS Research Paper

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The economics of HIV and AIDS is a strange creature. There is no so-called economics of mumps or economics of appendicitis. It is of course associated with sex, but then so are syphilis and gonorrhea, yet there is no economics of syphilis or even an economics of sexually transmitted infections. The difference lies in not only the fact that the virus is most often transmitted through sexual intercourse, an activity intrinsic to our humanity and therefore of universal interest, but also the fact that its presence is not always obvious, the consequences if untreated are fatal within only a few years, and there is as yet no known cure. It is therefore alarming in both its mode of transmission, striking at the very heart of one of our most intimate and pleasurable activities, and its catastrophic impact at the personal level. Because it affects adults who in many cases will be key household income earners, it also has profound social implications. Its impact on labor morbidity, productivity, medical and insurance costs, and public health expenditures affects business efficiency and a number of macroeconomic variables such as savings, labor and capital productivity, and private and public borrowing, and it raises important issues of the role of the state in prevention, care, and treatment. When the behavioral aspects of the risks of infection are included, then it is clear that it is a topic of considerable interest to economists.

To say that HIV is transmitted primarily through sexual intercourse is a reflection of its most common mode of transfer. More generally, the virus is transferred from one person to another by means of one person’s bodily fluids entering another’s bloodstream. It has a brief survival period out of the body and cannot be transferred via normal healthy skin contact, saliva, perspiration, or mosquito bites. The most common means are through heterosexual intercourse, homosexual intercourse, intravenous drug (IVD) ingestion by infected needles, and occasionally through contaminated blood products in a hospital or clinic environment. By far, the most common of these globally is the first, with a predominance in Africa, especially southern Africa where adult prevalence rates of above 20% are common, though IVD is an increasingly important source in former eastern bloc countries of Europe, central Asia, and India. In North America and western Europe, heterosexual, homosexual, and IVD have roughly equal weight as sources of infection but collectively amount to less than 1% of the relevant adult populations.

It is useful, before proceeding to a review of economic analysis in the area, to summarize the main characteristics of the disease. Only from 4 to 6 weeks following infection, and sometimes up to about 3 months later, can the presence of the HIV virus be detected. During this period, there will be no outward symptoms apart from a brief flulike illness, but the victim will be highly infectious. There then follows a period of 5 to 7 years when the HIV virus eats away at the infected person’s immune system. As this process develops, the individual becomes gradually weaker, in due course becomes highly prone to opportunistic infections such as TB and pneumonia, and if left untreated, will generally die within about 10 years. In the context of the developing world, death tends to occur sooner because of poorer general nutrition and greater environmental health hazards. For biological reasons, women are more likely to be infected than men (that is, the transfer from an infected man into the vagina is more probable than the reverse). Morbidity and mortality thus tend to follow infection after a lag of some 5 to 10 years, making for a complex epidemiological cycle.

There is no cure, but a number of drug combinations are available that when taken regularly and continuously for life will raise and keep the individual’s immune system at a level such that his or her life expectancy is considerably extended, though the individual will always remain HIV positive. Often, there are side effects that entail a shift to what are termed second line drugs, which tend to be more expensive. There is also around a 30% probability that a child born to an infected woman will be HIV positive. Treatment through intake of antiretroviral drugs can be costly, and there are important debates on international trade in pharmaceuticals concerning the rules of the WTO regarding which patent rights may be protected and when producers of generic supplies may legitimately trade. The research paper returns to this in a subsequent section.

For economists, all this gives rise to three broad areas of interest. One is the impact of HIV and AIDS on the economy at the macro, sectoral, or individual business level. The second concerns the choices made by individuals that expose them to the risk of infection and the consequences at household level, and the third is concerned with the whole area of public response, the role of the state, and the potential impact on public expenditure and taxation. A number of other issues arise from these, including the role of the social and institutional environments, the availability and cost of the drugs on which treatment depends, and the impact of stigma. The existing literature is composed of a very large number of heterogeneous papers, from which only a small representative selection is possible here. Although there are few classics specific to HIV and AIDS, most analysis draws on mainstream theory and its classic works.

Impact on the Economy

This is a disease that principally affects sexually active adults, and to the extent that they are disabled by it, there is an impact on labor productivity and economic output. A simple list includes reduced productivity while at work through fatigue, increased absenteeism, higher than normal attrition rates and costs of recruitment, loss of skills, and time off to attend funerals, care for sick family members, and attend them in the hospital. Intergenerational effects will also appear as children in many poor communities are withdrawn from school and adult skills are not passed on (Bell, Devarajan, & Gersbach, 2004). At the macroeconomic level, these microeffects manifest themselves in reduced savings levels, reduced size of labor force (varying by sector and skill level), impact on public health expenditure, inflation due to increased business costs (group medical insurance, taxation, frequent recruitment), and possibly increased government borrowing, leading in turn to increased imports, balance of payments, and exchange rate problems. It is clear that in countries such as South Africa, Botswana, Zimbabwe, and Zambia, where HIV prevalence rates have exceeded 20% of adults between the ages 15 and 49 for most of the twenty-first century to date, the macroeconomic impact is likely to be considerable.

The most common ways in which attempts have been made to measure the macroeconomic impact of HIV and AIDS are either by cross-country econometric estimation or by application of macroeconomic models of varying degrees of complication (for reviews, see Haacker, 2004a, and Booysen, Geldenhuys, & Marinkov, 2003). Econometric estimation takes the form of including an HIV variable among others conventionally seen as affecting economic growth, such as savings rates, private investment, and education levels of the labor force. This approach, although able to produce statistically significant results (e.g., McDonald & Roberts, 2006), is less satisfactory as an explanatory or predictive tool than macroeconomic growth models that contain behavioral equations. The simplest of the latter start from the traditional textbook Cobb-Douglas type of production function, where output is a function of capital and labor (taking a variety of mathematical forms entailing different assumptions). These use aggregate data on capital stock (by value) and labor and insert assumptions on the impact of HIV and AIDS on these input factors to estimate the effect on productivity and output, thus having two basic growth scenarios: with HIV and AIDS and without. The basic model can be extended to include several skill levels of labor and, important in the case of many developing countries, the formal and informal labor markets. The following is a simplified version of an example from an application in Botswana, a country with one of the highest rates of HIV infection in the world:

economics-of-hiv-and-aids-research-paper-formwhere Y is output, Es and Eu represent labor supplies of skilled and unskilled labor, respectively, and K is the capital stock. The shares of output attributable to each factor are Bs, Bu, and p= 1-Bs -Bu. An exogenous technological trend is represented by yt (Econsult, 2006; Jefferis, Kinghorn, Siphambe, & Thurlow, 2008). The authors then explore the principal ways in which HIV and AIDS are likely to affect the labor supply and the capital stock and feed this into the model. The impact on labor supply will be affected by the degree of availability of antiretroviral treatment (ART), which requires additional assumptions. Other assumptions underlie the validity of such models in representing economic behavior. They assume, for instance, that the economy responds to changes in factor prices and that markets will clear, but they also usually assume constant returns to scale and a fixed rate of factor substitution. The authors of this study on Botswana concluded that the annual growth rate of GDP at market prices from 2001 to 2021 would be 4.5% in the absence of AIDS, 2.5% with AIDS, and 3.3% with AIDS plus ART (Econsult, 2006, p. 55, Table 5.3).

An interesting extension of this approach is where the concept of health capital is introduced as an additional capital variable. McDonald and Roberts (2006), for instance, incorporate (in an augmented Solow model) technological change and labor, plus physical, education, and health capital. Health capital itself is defined in a reduced-form equation as a function of lagged per capita income, education capital, nutritional status, HIV and AIDS prevalence, and proportion of the population at risk of malaria in a cross-country analysis. Proxies for health capital (the dependent variable) are life expectancy at birth and infant mortality rate. The results of the statistical analysis for the African sample indicated that a 1% increase in the HIV prevalence rate was related to a 0.59% decrease in income per capita. For the world sample, the decrease in income per capita was 0.5%, and for the developing world sample, it was 0.8%, each case having been brought up by a suspect high rate for Brazil.

An alternative means of estimating the impact of HIV and AIDS on the macroeconomy, which attempts to deal with the more complex and more realistic situation where the economy is broken down into a number of interacting sectors, emerged during the second part of the twentieth century in the form of computable general equilibrium (CGE) models for forecasting macroeconomic outcomes. As the name indicates, these models are (or claim to be) computable and hence testable versions of general equilibrium models of an economy. That is, they are versions of mathematical models in which the macroeconomy is the product of a number of behavioral decisions by consumers and producers at the microlevel of supply and demand in individual markets. The theoretical foundations of such models are found in the work of Walras, Arrow, Debreu, and others in the early and mid-twentieth century and are reflected in a substantial literature on the conditions that determine the possibility and existence of a general equilibrium in which demand equals supply across all markets freely and simultaneously. From this body of theory and the development of increasingly powerful computer capacity, economists working in economies where there is an abundance of current and historical data have been able to evolve ever more sophisticated computable models based on this theoretical foundation.

In practice, however, the degree to which many applications do in fact adequately recognize and incorporate the variety of experience at a microeconomic level has been questioned (Booysen et al., 2003; Johnston, 2008; Mitra-Khan, 2008). The focus in most applications of specific country forecasts of macroeconomic growth rates and associated variables (for example, by the IMF and World Bank) leads unavoidably to the primacy of macroeconomic and aggregated sectoral data sources, most frequently in the form of a social accounting matrix (a matrix representation of the national accounts of a nation, indicating the flow of activities from one sector to another). Even at this level, the data demands are considerable, and for many of the countries most affected by AIDS, the data are inadequate. Botswana is one of the better-off in this respect, and in the study referred to previously, the results of a CGE model with 26 productive sectors, 5 occupational categories, 3 regional areas, and a male-female breakdown are that the rate of growth of GDP from 2003 to 2021 would be 4.6% in the absence of AIDS, 3.0% with AIDS, and 3.4% with AIDS plus ART (Econsult, 2006, p. 101, Table 9.2).

Much of the work on applying CGE models to the macroeconomic impact of HIV and AIDS on an economy has taken place in South Africa, where the availability of data and local economic expertise, combined with levels of HIV prevalence above 20%, have stimulated much activity with the appearance of a number of such models. Some of these are demand-side driven, some are supply-side driven, and others have used a human capital approach. In a detailed review by Frederik le Roux Booysen et al. (2003) two of these (by ING Barings and the Bureau for Economic Research) are shown to forecast not only a difference in annual real growth of the South African GDP between an AIDS and no-AIDS scenario of-0.5 to -0.6 percentage points, but also a difference in predicted average annual growth in real per capita GDP of 0.9 percentage points in each model. The latter, in other words, is saying that real per capita growth in GDP is 0.9% higher in the presence of HIV and AIDS than without it. This seemingly perverse conclusion is created where the population growth rate is lower, as a result of HIV and AIDS, than growth in GDP. On the other hand, a CGE application to the Indian economy in 2006 concluded that the real GDP per capita growth rate between 2002 to 2003 and 2015 to 2016 was 6.13% with AIDS and 6.68% in the no-AIDS scenario. Real GDP itself was predicted to grow at 7.34% with AIDS, compared with 8.21% without AIDS, a difference of 0.87 percentage points (Ojha & Pradhan, 2006, Table 1). The latter is slightly higher than the corresponding figures for the growth rates with AIDS and without AIDS in South Africa, but too much should not be made of the differences since they will reflect different assumptions and specifications in the models and differences in the respective economies themselves.

Although these various models exhibit a high degree of mathematical sophistication, their output depends nevertheless on the quality of the data that is inputted. This includes the accuracy of existing measures of HIV prevalence (by which is usually meant the percentage rate of infection among adults aged between 15 and 49), which in most countries can be estimated from only a number of indicators since not all those infected will have come forward to be tested. In many developing countries, moreover, testing facilities are few and far between, and causes of death are often put down to an opportunistic disease such as TB or malaria. The most reliable figures historically have tended to come from testing of pregnant women at antenatal clinics, from which extrapolation, based on various assumptions, is made to the adult population as a whole. The introduction of mobile testing equipment has enabled more accurate prevalence rates to be gathered through house-to-house surveys, but accurate measurement still remains a problem in many countries, especially if there is a recent history of civil disorder.

Such data uncertainty also makes it difficult to forecast the epidemiological progress of the disease and hence the likely impact on the labor force, especially when possible behavioral changes in response to public-awareness-raising campaigns are taken into account. Equally uncertain is the timing of the appearance of AIDS, which will depend on the degree to which ART is likely to be available in 10 to 20 years’ time, its adherence rates, and the likely costs to the public health services. There is also in many countries a relative absence of reliable and relevant micro-economic information, such as the effect of HIV and AIDS on labor morbidity and productivity, for the purposes of the macroeconomic models. Will labor productivity be reduced by 20%, 30%, or even 50% by the HIV epidemic in certain countries? Assumptions very often have to be made on the basis of very little empirical evidence, and conclusions must be tested for their sensitivity to different assumed values.

The accuracy of the forecasts of such models on the macroeconomic impact of HIV and AIDS has also been questioned on the grounds that the division of labor in many countries is heavily genderized and that the impact at household level differs depending on whether an adult man or an adult woman (and in either case, a household head) is hit by AIDS. Evidence suggests that a higher proportion of female nonagricultural workers in sub-Saharan Africa are in the informal sector than the corresponding figure for men, and thus, that to the extent that women tend be more susceptible to HIV, the impact on the informal sector (which is substantial in many developing countries) will be understated by models that do not recognize the gendered segmentation of the labor market. On the other hand, where the burden of maintaining household production falls on women, their productivity is likely to increase, and hence, the negative impact will tend to be overstated (Johnston, 2008). This example illustrates the importance of understanding institutional and cultural constraints at microlevel.

Moreover, in addition to these obvious direct monetary costs of an epidemic, including both internal and external, there are welfare losses that are less easily measurable. For an individual infected by HIV who doesn’t receive treatment, there will be not only a loss of income earning ability but also the loss of years of life and quality of remaining years. Nicholas Crafts and Markus Haacker (2004) illustrate this in a standard utility curve diagram in which expected lifetime utility is a function of annual income and life expectancy. The effect of HIV infection is to move the individual to a lower utility curve, at a point where both income and life expectancy are lower than before. Thus, the fall in income alone does not capture the total welfare loss to the infected individual. The authors then develop this model algebraically and use estimates of the value of a statistical life (VSL) to estimate the welfare effect of increased mortality across a sample of AIDS-affected countries. The VSL is a concept that measures the value of a variation in the risk of death and has been frequently estimated by surveys on individual willingness to pay for a given reduction in that risk. Given some qualifications regarding the paucity of data to estimate VSL in many developing countries, the authors show that the total welfare loss to countries such as South Africa, Zambia, and Botswana could range from 67% to 93% of each country’s GDP (Crafts & Haacker, 2004, Table 6.2). Other theoretical work on welfare includes highly mathematical models (such as overlapping generations models) on the optimum control problem of social planners as they allocate limited resources in an economy to control an HIV epidemic at the cost of reduced levels of consumption (Shorish, 2007).

Choices and Behavior of Individuals

As the discussion in the previous section indicated, any model of general equilibrium, or one that explicitly recognizes the links between consumers and producers at the microeconomic level and their aggregate impact in macro-economic terms, must begin with assumptions about microlevel behavior. The common theoretical benchmark of a perfectly competitive equilibrium depends on a number of structural axioms, such as each consumer and producer having perfect knowledge, being a price taker, and striving to maximize either utility (satisfaction) or profits; diminishing marginal utility and diminishing marginal rates of substitution between goods demanded by the consumer and between factors of production used by the producer prevail (that is, indifference curves and isoquants are concave and production functions are convex); resources being perfectly mobile; and transaction costs being zero. Many if not most of these require modification to reflect real-life situations. The sort of rational individual they imply is traditionally referred to in the literature as homo economicus, or economic man, an expression criticized by many feminist economists as much for its conceptual roots as for its terminology.

The relevance of this to individual behavior in the context of HIV and AIDS may not be immediately obvious, but a moment’s reflection shows that the sexual relationship is one in which each person concerned is making a choice between alternatives that have a number of possible outcomes. One set of outcomes in particular may affect the individual’s health and hence future lifetime income. A common starting point for analysis at this microlevel is provided by human capital models in which individuals invest in education and health in order to enhance their future stock of health capital (and hence income earning opportunities) and the general quality of their own lives and those of partners and near relatives. In doing so, they are forced to make choices between work and leisure, between activities that improve health or that have the potential to reduce it, and between more medical insurance and reduced current consumption and vice versa. These all lend themselves to traditional analysis of utility maximization, duly time discounted and adjusted for uncertainty, and many models of this type derive from original work by Michael Grossman (see Folland, Goodman, & Stano, 2007, for a summary). In the case of HIV uncertainty takes the form of ignorance about a partner’s HIV status, of the probability that they may be seropositive, and of the risk of becoming infected through a single act of intercourse. Unless the partner is in an advanced stage of AIDS, it is impossible to tell visually if he or she is infected, and hence, the exchange takes place in a context of incomplete information. In economic welfare terms, and somewhat unromantically and at its simplest, mutually agreed sexual intercourse involves an exchange of access to the most intimate parts of one’s body in order to achieve an anticipated sensual satisfaction, whether or not money is present, and as such has the potential to be Pareto improving, except for the fact that complete information is absent in one or both of the parties to the exchange (Gaffeo, 2003).

Various mathematical models of microlevel behavior have been proposed and typically consider the numbers of people (or an individual) uninfected at the beginning of a period, the probability of becoming infected in each act of intercourse with an infected person, the number of partners during the period (though not always whether they are sequential or overlapping), and the probability that any one partner is infected. In one version, the trade-off then faced by an individual is the current benefit from more sexual activity and partners versus the costs involved if he or she becomes infected, where the infection is irreversible (Auld, 2003). In this example, the author predicts that where an epidemic is expected to get worse, certain individuals may actually increase their risky sexual activity, with the obvious policy implication that it may not be wise for governments to publicize the worst-case scenario as a means of reducing risky behavior. Another example constructs a lifetime model of utility from sex that takes account of the risks of infection and the relative pleasures from risky versus nonrisky sex, summed and discounted over an expected lifetime, from which the extent of the epidemic is determined significantly by the sensual difference between sex with or without condoms (corresponding to non-HIV risk and HIV risk) (Levy, 2002).

Underlying the development of such models is the interesting area of apparent dissonance between the predictions of rational decision making as conventionally understood in mainstream economic theory, as presumed in the human capital model, for instance, and the seemingly irrational behavior of individuals continuing to engage in HIV-risky sex despite knowing of its fatal consequences. It is unsatisfactory, however, to dismiss such deviance from the rational model of “economic man” as irrational and hence somehow outside the range of economic analysis. There are also parallels with persistent smokers, overeaters, and dangerous drivers, for all of whom knowledge of the outcomes of their actions is not sufficient in itself to bring about a change of behavior. In the case of an epidemic such as HIV where the status of a casual partner is unlikely to be known, plus the knowledge that the virus is not transmitted in every instance of intercourse, a person may be prepared to take the chance. There is some evidence that in the face of average figures on risk, many people are risk takers in that they feel that the risk to themselves is less than the average, leading to unrealistic optimism (Gold, 2006). Many—especially young people—have confidence that it won’t happen to them. In such cases, a rational calculation is still being made. This is similar to the cognitive dissonance approach of George Akerlof and William Dickens (1982) in which choice is being made between beliefs such that a favored outcome can be justified.

It is also sometimes argued that in certain developing countries where life expectancy is already low because of general poverty, the future is heavily discounted in favor of short-term pleasures, especially if AIDS is known to not take effect for several years. This may also be associated with a fatalistic outlook. Evidence on the extent of this view is scarce, however. A factor often overlooked is alcohol consumption prior to sex. Social drinking of alcohol is a widely accepted phenomenon in many societies, including those in southern Africa where the HIV prevalence rate is exceedingly high. It is well known that among the immediate effects is confused thinking, but this does not imply totally random behavior. It does tend to mean that the gratification of immediate pleasures comes to the fore and that the future consequences of one’s actions are again heavily discounted. Other possibilities suggest that an individual may decide in advance to avoid a risky activity, but when the opportunity arises or if the social context encourages it, the decision is reversed, in a form of situational rationality. In consumer theoretic terms, one thus has the phenomenon of preference reversal with implications for discounting models.

Some examples of indulgence in risky sex are entirely rational in the context of the individual at the time. Thus, many women are forced into transactional sex by economic circumstances and are in a weak position to negotiate safe sex. This may also be the case of many women in regular relationships including marriage. For others of either sex, the availability of ART may lead to an increase in risky sex, as may explain the positive correlation between the availability of ART and HIV incidence in the United States in the early 2000s (Lakdawalla, Sood, & Goldman, 2006). For others, the stage of the epidemic may be an influence: If it is believed that it will get worse in the future, then this may lead to an increase in the number of partners in the present for people so inclined. Alternatively, as the chance of any one partner being infected increases, the marginal risk from an additional partner may be viewed as irrelevant.

What these examples all point to is that the challenge of changing behavior through public policy (such as campaigns for ABC: abstain, be faithful, condomize) is considerable, though there is evidence that condom use by sex workers has increased in many countries, sexually active people are having fewer partners in other countries, and young people (where they are free to do so) are delaying marriage and avoiding sex before marriage. This raises the question of the role of governments in prevention, care, and treatment of HIV and AIDS, discussed in the next section.

Public Intervention

The usual arguments made for government intervention to limit the spread of the epidemic is that there is market failure in that incomplete and asymmetric information exists between the parties and that the externalities of spreading infection are not readily internalized. In theory, in the absence of this failure, the individual would be able to take his or her own informed action to avoid infection (that is, make rational choices that maximize his or her health capital), and any third party affected would be able either to negotiate compensation or to pay for the infection not to be transmitted (the theoretical context here is that of the Coase Theorem, which is explained in most intermediate microeconomics textbooks). A simple example of the latter is the cost of a condom, and an example of the former is the higher price charged by a commercial sex worker for sex without a condom. Information shortfalls refer not only to information about the nature of the disease but also to the HIV status of each partner, as known both of themselves and of the other. The consequences of this ignorance on wider society—that is, on the expansion of the epidemic and on the externalities of public health costs, taxation, economic productivity, and diversion of public expenditure from other social welfare priorities—are likely in the case of HIV and AIDS to be substantial, from which it follows that state intervention to preempt the growth of an epidemic and minimize the extent of related externalities is likely to be socially cost effective, though this still requires justification via cost effectiveness analysis of alternative strategies.

One approach is to encourage the internalization of the externality—that is, to eliminate it by having its probability contained in the transactional arrangement between the two people directly involved in an exchange. An example is through state subsidy in the provision of condoms, commonly known as social marketing. Other examples include the wide distribution of information about HIV and AIDS, including myths leading to stigma; establishment of national AIDS agencies; and increased availability and subsidy of voluntary counseling and testing. An interesting, if somewhat controversial, consequence of the last of these is that in a number of African societies, it is increasingly expected that couples intending to get married will undertake HIV tests (in subsidized clinics). These are examples of public intervention to internalize potential externalities. In general, such market-based compensatory negotiations, as theory suggests, between the two parties to an exchange will not be practical in instances of sexual trading, and in order to forestall or mitigate the potential impact of an epidemic on the wider community, the economy, and the pub-lic health services, there is a strong argument for state intervention.

The closest to a market solution tends to be found in treatment through private medical insurance, which in principle could cover physician fees, medication, hospital care, and loss of earnings but also contains the classic problems in the economics of insurance of adverse selection and moral hazard. The first refers to the tendency for those most likely to make a claim to seek to be members of an insurance scheme, and the second refers to the tendency of those within a scheme to maximize their claims income. In response to problems of this kind, insurance companies have adopted a variety of controlling regimes. In the case of HIV and AIDS, many require a statement of HIV status from new members and will charge a supplementary premium if the applicant is seropositive. This can have the effect, of course, of excluding those on low incomes, and in such cases, there are often publicly funded schemes that can step in. States in the United States provide HIV and AIDS treatment under the AIDS Drug Assistance Program (ADAP) for those otherwise unable to afford ARVs. To underline the point made about the social differences in the impact of HIV, it should be noted that in 2008, 59% of beneficiaries were African Americans and Hispanics and that only 35% were non-Hispanic whites (Kates, Penner, Carbaugh, Crutsinger-Perry, & Ginsburg, 2009), with an uneven geographic distribution. In most of the poorer developing countries, in which the highest rates of HIV prevalence are found, per capita disposable incomes are insufficient either to fund an adequate public health service through taxation or to purchase private health insurance. Only very few are able to afford private purchase of ART, which is often subsidized by international aid.

Market solutions are also constrained by social practices and institutions and tend to overlook relative positions of power. Of course, these can be taken as givens within which markets can be made as efficient as practically possible. However, it is not satisfactory, for instance, to take many traditional gender relationships simply as givens. Equalizing knowledge of HIV and AIDS does not equalize negotiating strengths between men and women when it comes to use of condoms or mutually agreed sex. In many societies, women also have fewer legal rights than men, fewer employment opportunities, and lower levels of education than men, all of which reduce women’s scope for economic independence and hence their market power relative to men. The same may be said of people with disabilities or certain minority ethnic groups. Care should be taken in assuming that vulnerability to HIV and AIDS is a function only of poverty or inequality. Botswana has one of the highest prevalence rates in the world and yet has one of the high-est per capita GDPs in Africa, with universal primary education, high levels of literacy, and an extensive public health service. The trigger for the HIV pandemic appears to have been rapid social change associated with increased urbanization and rising social aspirations.

All such factors are present in decisions by governments to intervene to mitigate the spread and impact of HIV and AIDS. These may be national governments informing and supporting their own populations out of domestic taxation, but in many cases, they are also likely to be augmented by international aid from bilateral and multilateral donors whose concern is partly humanitarian and partly motivated by a broader agenda of civil stability, promotion of democracy, sustainable economic growth, and international security, in which the HIV and AIDS pandemic is seen as a threat. Governments also respond to private lobbying, often religious, which favors certain moral positions regarding sexual relations. In this field, economic calculus is only one factor among many that politicians have to consider when formulating policy.

HIV and AIDS and Social Capital

Because of the way in which HIV affects working adults and, in many cases, heads of households, support within the immediate family is put under considerable strain, and help is often sought from members of extended families, neighbors, or the local community in general. Affected household members, in other words, draw on what has been termed their social capital for the additional resources needed to care for or treat an infected member or for help in holding the household together. Social capital is a concept that has been defined variously in the past and has been used loosely across a number of social science disciplines. A typical definition is found in the OECD Glossary of Statistical Terms (Organisation for Economic Co-operation and Development, n.d.), where it is described as “the norms and social relations embedded in the social structures of societies that enable people to co-ordinate action to achieve desired goals.” It has also been defined as the “social structure which facilitates cooperative trade as an equilibrium” (Routledge & von Amsberg, 2003, p. 167) in which it is a means of reducing transaction costs in the absence of complete and enforceable contracts between individuals. As such, these definitions are also associated with a perception that social capital has an important positive role to play in the economic growth process, where in addition to the usual inputs of labor and physical (or monetized) capital, it becomes necessary to include norms of behavior, social networks, and trust as part of the informal institutional environment that supports most economic activities.

To the extent that HIV and AIDS damage social networks and trust within organizations and hence productivity, they also negatively affect economic growth (and are often implicit in the macroeconomic models discussed above). For example, additional work contracts may be required to cover absenteeism, or delays may appear in delivery of goods and services as informal personal links are weakened. In the HIV and AIDS context, social capital is also often brought into play at the microlevel, as indicated in the opening lines of the previous paragraph. A simple example of this would be an individual who helps a sick neighbor to purchase food, or it could be a group of neighbors who may help a struggling family with various farming tasks. However, the nature of HIV and AIDS is such that without ART, the pressures on the household are unremitting as time goes on, and the calls on the goodwill of extended family and neighbors eventually become resented. Another way of putting this is that the household’s social capital is gradually used up. Furthermore, the stigma associated with AIDS can immediately restrict the amount of social capital available to a stricken individual or household.

It is, of course, extremely difficult to quantify social capital and hence to put a monetary value on it, and accordingly, it is common to use proxy indicators. An example is the measure of trust within communities, as gathered by the World Values Survey, for instance, which may then be taken as a dependent variable indicative of the level of social capital present in a range of countries. This can then be regressed statistically against assumed determinant independent variables including governance indexes, inequality data, and the prevalence rate of HIV and AIDS (David, 2007). The results show that a one standard deviation increase in HIV prevalence is associated with a 1% decline in the trust measurement index. And other things being equal, a country with a very high HIV prevalence rate would have a social capital level some 8% lower than one with a low rate (David). However, such studies are faced with serious methodological problems, largely deriving from the nebulousness of the concept of social capital and hence the characteristics of the dependent variable, plus problems of collinearity among the independent variables.

There are also a number of social norms, formally and informally institutionalized, that have a differentiating effect on the extent and type of social capital on which an individual can draw. In many developing countries, for instance, widows have fewer inheritance rights than men, and hence, their ability to survive independently is diminished, which may mean their reserves of social capital are both lower and used up more speedily. Orphans likewise may find that their inheritance rights are lost through family manipulation.

Economics of Antiretroviral Drugs

The availability of medication for treatment of HIV and AIDS has been a contentious area since the emergence of effective antiretroviral drugs that can control the immune deficiency created by the virus (though they cannot as yet eliminate it from the body). These drugs allow people infected by HIV to live active lives for many years, but they are demanding in terms of physician monitoring, side effects, and periodic regime changes caused by diminishing individual effectiveness. Initially, these drugs, usually now given in triple combinations, were very expensive but have come down substantially in price, especially for generic equivalents and, with international donor support, have enabled a gradual rollout in the most affected developing countries. There is no space here to go into the various regimes and their relative costs, but it is important to note that the regimes’ provision and availability is part of the wider issue of drug supply and demand, in which several major economic problems are present.

The large pharmaceutical corporations that supply drugs tend also to be major researchers into the development of new drugs, but they argue that the opportunity to recover the costs of development would be compromised if competitors were able to reproduce the new drug too quickly. In more general terms, this is an issue of intellectual property rights. Since the nineteenth century, most industrialized countries have approached the problem by providing patent protection for a limited number of years, based on a patent registration scheme. Is this a case where the market has therefore failed? There are those who argue that the discoverer of a new drug has the advantage of being first in the field and that it is only because of effective political lobbying that patent laws have come into being, simply permitting excessive monopolistic profits to be made by beneficiary corporations. Evidence of this is difficult to come by and to interpret: For instance, profits higher than the industrial average will be defended as essential for the finance of research and development of new drugs. An alternative would be for more publicly funded research in universities or specialist research institutions. Underlying such proposals is the belief that medical research and its products are merit goods, having positive social externalities similar to the provision of literacy in the population, and that if left to individual choice, then the generated supply would be socially insufficient. Hence, a political decision is taken to support production either from taxation or, in the case of innovations, by patent laws. In the latter case, it will be the immediate consumer who provides the subsidy, which has some justice since the consumer is the direct user, but of course in social terms, this will tend to exclude the less well-off.

In most countries today, some form of patent protection exists, and it is relevant here to examine briefly how it is implemented and policed, especially in the context of a global economy and the ability of private sector companies in countries like India, Brazil, and China to reproduce, at considerably lower cost, many of the most advanced drugs developed by the larger, usually Western-based, pharmaceutical corporations. These nonpatent suppliers are generally referred to as generic producers in that they manufacture from a generic formula and sell products identical to the branded version of the original innovating company. In some cases, the original patent may have expired, but in others, this is not so. In the international market, this is clearly a threat to the ability of those companies that originally patented the drugs to receive the return they anticipated, and the problem becomes one of international trade regulation, in which the World Trade Organization (WTO) plays a central role. Following from the Uruguay Round trade talks (1986-1994) in which the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) emerged, the Doha Declaration on the TRIPS Agreement and Public Health was produced at the fourth ministerial meeting in 2001, in which the conditions were laid out under which a member country would be permitted short-term acquisition of generic drugs, usually in the context of a national emergency. The agreement made specific reference to HIV and AIDS, tuberculosis, malaria, and other epidemics, and to members’ right “to promote access to medicines for all” (WTO, 2001, K 4). This directive contained a condition that generic production (under what is termed a compulsory license) should be for domestic consumption only, but this clearly left the position of those countries without production facilities out of the picture. Consequently, the general council of the WTO amended the TRIPS agreement in December 2005 to waive the domestic consumption requirement so that (the UN-defined) least developed countries would be able to import drugs from generic suppliers abroad. This amendment contains a number of conditions to prevent cheaper generic products from being reexported to nonqualifying countries. To participate, of course, each member country needs to have in place an appropriate legal structure regarding patents and drug registration.

What this account of the complexities of international trade in medical drugs, including HIV antiretrovirals, illustrates is that it has evolved into a highly regulated market, both domestically within any country and internationally, and that any analysis has to pay attention to the considerable political lobbying power of transnational pharmaceutical corporations (bigpharma, as critics tend to refer to them) and to the competitive nature of nation states in protecting their own citizens. Insights in this area are to be gained through analysis as much by political economy and institutional economics as by traditional theory. Nevertheless, the more successful the branded producers are in protecting their markets with higher prices, the more likely, given their limited resources, are many poor countries and their citizens to look to generic suppliers one way or another to meet their demands. In such a context, another characteristic of the market in health provision—namely, asymmetric information about complex products—allows charlatans and counterfeiters to operate in the market, and there is evidence that the latter is occurring on a major international scale (see Web sites of the U.S. Food and Drug Administration and of the World Health Organization). In such an international environment, the ability of many developing countries to provide ART to all those infected by HIV is a major challenge that for the foreseeable future can be approached only with the support of international aid and technical assistance.


In this necessarily short paper, it has been impossible to do justice to the very many applications of economic analysis to individual country studies of the impact, at national, sectoral, and household levels, of HIV and AIDS and of the cost effectiveness of various forms of treatment and care that have emerged over the last 20 years or so. This is a very rich field with many papers produced or sponsored by multilateral agencies, international NGOs, and private or academic research institutes, not all of which subsequently appear in journals. Limited space has also led to a concentration on HIV infection by means of heterosexual activity, since this is by far the most common means of transfer in those countries worst affected. The points covered, however, have an applicability to other means of acquiring infection, principally through homosexual activity and intravenous drug use, in which for the latter, at least, there are particular problems of adherence to ART, and in all cases, including heterosexual transmission, continuing problems of societal stigma.

See also:


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