The paper addresses the impact of HIV/AIDS on per capita output and income, with particular emphasis on the role of labor mobility between the formal and informal sectors, and the impact of the epidemic on investment decisions. The study finds that HIV/AIDS affects both the supply of labor and the demand for labor in the formal sector. Only if there is a significant rise in the capital-labor ratio, will there be an increase in formal sector employment. However, this is associated with a decline in the rate of return to capital. To the extent that companies respond to this by reducing investment, conventional models underestimate the adverse impact on employment, per capita output, and income. The analysis of the impact of HIV/AIDS on output is complemented by an assessment of the impact on income.
This paper provides an overview of the potential macroeconomic effects of HIV/AIDS in Botswana, focusing on the key channels through which the pandemic is likely to affect the economic outlook and on the uncertainties involved. To estimate the impact of HIV/AIDS, a dual-economy equilibrium model is constructed and simulated under different scenarios. Depending on exactly how AIDS affects the outlook, GDP growth is projected to fall from around 5½ percent a year without the pandemic to between 1½ and 2½ percent a year with AIDS. Non-negligible redistribution effects across sectors and labor skill categories are also likely to arise. Finally, the paper draws attention to the potential effects of HIV/AIDS on the long-term fiscal position of Botswana, highlighting the need for increased international support and/or lower drug prices so that the widespread introduction of anti-retroviral drug treatments is feasible.