This Selected Issues paper for Botswana highlights the macroeconomic impact of an effectively implemented National Strategic Framework (NSF) program. The NSF is anchored on the goals of prevention, care, and support; management of the national response; economic impact mitigation; and provision of a strengthened legal and ethical environment. The treatment of the pandemic focuses on the administration of antiretroviral drugs to the infected, the effect of which would be to prolong their lifespan, as well as increase the average level of productivity.

Abstract

This Selected Issues paper for Botswana highlights the macroeconomic impact of an effectively implemented National Strategic Framework (NSF) program. The NSF is anchored on the goals of prevention, care, and support; management of the national response; economic impact mitigation; and provision of a strengthened legal and ethical environment. The treatment of the pandemic focuses on the administration of antiretroviral drugs to the infected, the effect of which would be to prolong their lifespan, as well as increase the average level of productivity.

I. The Macroeconomic Impact of HIV/AIDS in Botswana: A Modified Framework1

A. Introduction

1. Botswana has one of the highest HIV/AIDS prevalence rates in the world; according to a 2002 national prevalence survey it is estimated at about 35.4 percent of adults in the 15-49-years age group. The overall prevalence rate has more than doubled since 1992, and an estimated 138,000 Botswana had died of AIDS by 2002. The high HIV/AIDS prevalence rates have resulted in declining life expectancy, from 65 years in 1991 to 56 years in 2001, according to official census data. The infant mortality rate is estimated at 55.2 per 1,000 live births, compared with 48 in 1991, and in contrast to an estimated 26.3 per 1,000 live births in the absence of AIDS. Some studies of the impact of HIV/AIDS estimate that the overall population growth rate by 2015 will average 0.9 percent per annum, compared with 2.8 percent in a no-AIDS scenario.2 In addition to the human consequences, the macroeconomic impact has also been well researched, and many studies, drawing on demographic projections and standard economic theory, have modeled the long-term negative impact of HIV/AIDS on total factor productivity, labor, capital, and output, among other variables.

2. The government of Botswana has developed a medium-term program, the National Strategic Framework (NSF) for HIV/AIDS 2003–2009 (NACA, 2003), the ultimate goal of which is to have an HIV/AIDS-free generation by 2016.3 The projected cost of implementing the NSF is approximately Pula 12 billion over the program years. This translates into an average of 5 percent of GDP spent on HIV-related spending per year, compared with the 6 percent of annual average GDP spent on the entire health sector in the past three years. Effective management of the pandemic would enable Botswana to reverse the declining human development indices and mitigate the adverse impact on the economy.

3. The objective of this paper is to model the macroeconomic impact of an effectively implemented NSF program. This is done by modifying existing macroeconomic models to take account of the possible improvements that would ensue under the NSF program scenario.

B. Recent Studies

4. A major study of the impact of HIV/AIDS on the Botswana economy was prepared by the Botswana Institute for Development and Policy Analysis (BIDPA) (2000). Using demographic projections of the population based on the future path of HIV, the study derived projections of the size of the labor force and the subsequent effect of HIV/AIDS on the economy. The study showed the adverse effect of HIV/AIDS on aggregate output, distribution of income among different groups, and the long-term fiscal outlook for Botswana. In addition, it showed that GDP growth in Botswana would be lower by an average of 1 to 2 percentage points a year as a result of AIDS.

5. Drawing on the BIDPA model, McFarlan and Sgherri (2001) focused on the effect of HIV/AIDS on the long-term productive capacity of the economy. Based on higher prevalence rates than used in the BIDPA study, their paper showed that the nonmining GDP growth rate would be 1.38 percent in 2010, compared with 5.2 percent in the absence of AIDS. In another study, it was estimated that the Botswana economy could be 33–40 percent smaller in size in 2010 than it would have been in the absence of AIDS.4 Haacker (2002) also concluded that HIV/AIDS affects per capita income mainly through its impact on human capital, as measured by the supply of experienced workers. Others include the impact on capital accumulation, on education, and on total factor productivity.

6. The negative impact of HIV/AIDS postulated in studies is sensitive to the effect of the pandemic on labor supply and the capital stock. To the extent that the NSF intervention program results in lower rates of new infection and a more productive life for the infected people, it is expected that the overall macroeconomic outcome is likely to be different.

C. HIV/AIDS Intervention Programs

7. Over the years, the government’s approach to managing the pandemic has been dictated by the trends in the disease. While, in the early phase of the disease, the focus was mainly on preventative health care, by 1993, as prevalence rates reached alarming proportions, comprehensive medical and social care was included in overall HIV/AIDS management scheme. The Medium-Term Program II for HIV/AIDS (1996–2002) was the first framework that undertook a multisectoral approach and consolidated program over a dispersed number of agencies. Though the government of Botswana does not disaggregate expenditure on HIV/AIDS ex-ante, budgetary allocations to the health sector increased remarkably over the years (see Table I) and both the public and private5 sectors in Botswana have put in place extensive enlightenment programs and integrated health care arrangements for HIV-positive employees.

8. The National Strategic Framework (NSF) for HIV/AIDS 2003–09, the successor to the Medium-Term II HIV program, represents the most ambitious attempt so far to grapple with the scourge of the pandemic. The framework proffers a systematic, multisectoral approach to managing the pandemic and makes the National AIDS Coordinating Agency (NACA), chaired by the President of Botswana, the focal point for facilitating and coordinating the various HIV/AIDS interventions in the country. Botswana has already received extensive support from developments partners, who are also expected to support the new medium-term framework financially (See Table 1.1).

Table I.1.

Botswana: HIV/AIDS National Strategic Framework, Program Cost, 2002/03-2007/081/

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Source: NACA (2003)

Fiscal year begins April 1

9. The NSF is anchored on the goals of prevention, care, and support; management of the national response; economic impact mitigation; and provision of a strengthened legal and ethical environment. These goals are supported by ten objectives with time-bound quantitative targets/indicators to measure their achievement (see Table 1.2). The treatment of the pandemic focuses on the administration of antiretroviral drugs to the infected, the effect of which would be to prolong their lifespan, as well as increase the average level of productivity. The mother-to-child transmission (MTCT) program provides treatment for pregnant women to prevent the transmission of HIV at birth. In addition, the treatment of tuberculosis and opportunistic and sexually transmitted diseases (STD) and voluntary counseling and testing (VCT), which are targeted at a wider audience than the HIV infected, reduce the rate of new HIV infections.

Table I.2.

Botswana: Quantitative Targets and Outcome Indicators of the NSF for at Risk Population, 2006 and 2009

(In percent, unless otherwise indicated)

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Source: NACA (2003).

Units.

10. The NSF is a comprehensive strategy for coping with the pandemic, to the extent that it is based on improved prevention efforts, a reduction in the rate of new infection, the expansion of existing health services to provide care to HIV patients, and the provision of safety nets, especially for the care of orphans. The need for such an integrated approach to respond to the crisis is underscored by the grim consequences of the high prevalence rates, as indicated in the decline in human development indices referred to above. A projection of the impact of HIV/AIDS in the baseline scenario, compared with a hypothetical no-aids scenario, shows that, by 2015, the number of new infections will almost double that of 2003. Furthermore, because of the high mortality rates, the population in 2015 will be about 1.3 million in the presence of AIDS, compared with a hypothetical no-aids scenario of 2.5 million (see Figure 1.1). The grim economic impact of these statistics will be evidenced in the decline in the labor force and its productivity, and in the overall growth of GDP.

Figure I.1.
Figure I.1.

Botswana: The Impact of HIV/AIDS, 1991–2015

Citation: IMF Staff Country Reports 2004, 212; 10.5089/9781451806380.002.A001

Sources: Spectrum Population Demographic Projection; and IMF staff estimates.

11. While the literature on the magnitude of the macroeconomic impact of HIV/AIDS is far from conclusive, some demographic studies have shown that programs that mitigate the channels through which it occurs, if successfully implemented, would likely result in better outcomes. Some important effects of intervention programs are the slowing of new infections, longer life expectancy, and a reduction in the growth of the orphan population. In the case of MTCT treatment, it was found that, compared with a no-intervention scenario that entails additional cost for treating opportunistic diseases in the orphan population, there are significant savings in the intervention scenario because of reduced infection and therefore cost of medical care in children born HIV positive.

12. In order to formally analyze the macroeconomic effect of an effectively implemented NSF, the dynamic change in demographics, which would moderate the pessimistic outlook for economic growth, would have to be factored into the medium-term outlook. This is done by extending current models of the macroeconomic impact of HIV, and applying the model to an AIDS-with-intervention scenario.

D. A Modified Model of Macroeconomic Impact

13. The model is a simplified Solow model that follows Cuddington (1993) but extends the framework by assuming that positive changes in the size and productivity of the labor force arising from the implementation of reform programs result in less pessimistic outcomes for the key macroeconomic variables. The modified one-sector model presented is highly generalized, yet simple enough to capture the moderating effect of changing demographic patterns on the evolution of HIV/AIDS and, subsequently, its macroeconomic effect through the labor force and capital stock. It comprises a production function equation, equations for labor and capital input, and a savings behavioral equation.

Production function

14. Production in the economy, Y, is characterized by a Cobb-Douglas-type technology with constant returns to scale. Equation (1) specifies that nonmining output is a function of labor, capital, and total factor productivity:

Yt=αγtLtβKt(1β),(1)

where Yt is the aggregate nonmining output, Lt represents the labor input, measured in efficiency units, and Kt is the capital input. γ is the rate of technological change over time, β is the share of labor in aggregate output, and capital’s share is derived residually. α is a scale factor adjusted to fit the actual data in the base year. Though mining output constitutes more than one-third of value added in output, its effect is abstracted from the model under the simplifying assumption that changes in mineral rents are not directly attributable to the factors of production.

Labor

15. HIV/AIDS has an impact on labor, in two ways, through the productivity and size of the labor force. The efficiency unit of labor is a function of the number of HIV infected, as well as the proportion of work period lost due to absence or reduced productivity:

Lt=i=1564(1ztait)ρitEit.(2)

By equation (2), effective labor supply, L, is a function of the number of the employed in the 15–64 age bracket, z, the fraction of work year lost per infected worker because of HIV-related absences and/or reduced productivity, and a, proportion of the population that is HIV infected. Eit is the employed workforce of age i at time t, while ρ measures the productivity gain that comes with experience on the job.7 This equation is very crucial to the impact of HIV/AIDS on the economy. The efficiency of labor depends not only on the age-specific labor force participation rate but also on the workers’ experience, which is increasing in the number of years spent working. The negative impact of HIV on the size of the labor force is from the decline in population, linked to the increase in AIDS-related death and absenteeism arising from sickness. The productivity of the labor force would be compromised by both the high rate of absenteeism and the replacement of more experienced workers by less experienced ones. While the overall effect is unambiguously negative on the population growth rate, the effect on the labor force would depend on the age distribution of the infection. Therefore, denoting the population growth rate as gn,

gnt=gnt(at).(3)

By equation (3), the population growth rate is a function of a, the total number of HIV infected. Higher rates of infection would result in future declines in the population, depending on how rapidly HIV progresses to AIDS.

16. Existing models have recognized that changes in the demographic pattern, arising from the pandemic will affect the skill and experience level of the workforce. In addition, higher rates of absenteeism because of the disease would result in higher proportions of lost workdays. In the AIDS-with-treatment scenario, however, these effects are not likely to be negative throughout. Intervention programs that slow the rate of new infections and improve the productivity and efficiency of the infected would affect the value of gn and z, and therefore improve the absolute number of the workforce, as well as its productivity and efficiency.

Savings behavior

17. It is assumed that capital accumulation is financed by domestic savings and foreign capital inflows, as expressed by

K=f(S,Sf),(4)

where S is the ratio of national savings to GDP and Sf is the ratio of capital inflows to GDP. The increasing cost of managing the pandemic imposes certain constraints on public and private savings, directly or indirectly. In Botswana, some of the health care expenditure is categorized as “development” or capital expenditure. Annual health care expenditure would be increasing in the number of HIV patients, as prevalence rates rise, necessitating a financing of the cost out of savings and/or reduction of other current expenditure in order to sustain the required level of HIV expenditure. Private sector savings is also not unaffected, as firms increase the share of expenditure allocated to HIV prevention and care. Therefore, the evolution of total domestic savings behavior under for HIV pandemic is

St=stYtxpatLt.(5)

where St is the total domestic savings and st is the domestic savings rate. Under the with-AIDS scenario therefore, national savings St would be equal to the national savings rate less x, the proportion of annual aids expenditure financed out of savings, p, the per patient pula cost, and atLt, the number of HIV-infected in the labor force.

18. There are clearly several possibilities that arise from equation (5). In the no-AIDS scenario, the second term on the right-hand side drops out. In the with-AIDS scenario, the current savings rate depends on the per patient aids expenditure, the proportion of this financed from national savings, and the size of the HIV infected population. In standard models of HIV, as the population of the infected grows and AIDS-related expenditure rises, the short- and long-run consequence is a declining national savings rate. However, this is not necessarily the case in an AIDS-with-intervention scenario. It is conceivable that the negative impact would be only in the short run, though possibly larger than in the no-intervention scenario, 8 while in the long run AIDS-related expenditure and the prevalence rate would decline. In any event, the savings rate would be a negative function of the AIDS prevalence rate. The effect of AIDS on foreign capital inflows is not usually as straightforward. AIDS may induce a higher level of foreign aid than would ordinarily be the case, thus moderating the impact on domestic savings. However, it could also result in reduced foreign private inflows.

Capital accumulation

19. Capital input is a function of the domestic savings rate and foreign inflows. As noted in (5), both the domestic savings rate and the rate of foreign inflows might be affected by HIV/AIDS prevalence. If capital is expressed in terms of the labor force, K/L = k, the period-to-period change in the capital labor ratio is

Δk=[s(a)+sf]f(ka)gn(a)kθk,(6)

where θ is the depreciation rate and other variables are as defined earlier. The equation specifies the capital-labor ratio as a function of the total savings rate, production per worker, the HIV prevalence rate, the population growth rate, and the depreciation rate.

20. In the one-sector model under consideration, the macroeconomic impact of HIV/AIDS could be moderated through effective intervention programs. The negative effect on the labor force would be ameliorated as new infections rates slow and the useful life span of the infected is extended. In the short run, the effect on capital accumulation will be negative, especially if a substantial proportion of the cost is financed from savings, a possibility that could be ameliorated with donor-supported capital inflows. These effects could, therefore, result in less pessimistic outlook for output growth than in a no-intervention scenario.

The model is now simulated using actual data from Botswana.

E. Model Simulation

21. The specified model is simulated over the period 1991–2015, based on the actual values of the variables in 1991, and under three alternative assumptions: no-AIDS, with-AIDS and AIDS-with-intervention scenarios. The demographic estimates for the simulation were generated with the Spectrum AIM model, 9 using initial values from the Botswana Central Statistics Office (CSO), population census projection for 1991. The latest available labor force survey for Botswana is the 1995/96 survey, which details the labor force participation rate per four-year cohorts for the entire population.

22. 1991 data were used for the initial values of nonmining GDP, capital stock, and gross domestic investments. The scaling constant of 40.02 ensured that the value of GDP implied by the production function matched the actual value in 1991. Following closely on previous works on Botswana, the elasticity of labor and capital-to-output ratio were assumed to be 0.3 and 0.7, respectively, and the exogenous technological trend was set at 0.004. The depreciation rate was put at 7 percent, in line with Botswana CSO practice. In the preprogram years, separate data did not exist for the cost of HIV/AIDS treatment, but a range of P 400 to P 954 per patient was determined after adjusting the Ministry of Health expenditure. In the program years, the average cost per patient was P 7,383 per year. In the past, Botswana was able to run a surplus on the recurrent expenditure account, which includes health care cost. In the medium-term program however, it is assumed that Botswana would finance 50 percent of the program cost from savings.

23. In simulating the demographic projections for the AIDS-with-intervention scenario, the targets set in the NSF program were used to project the expected changes in the population and the prevalence rates. The key assumptions of the AIDS-with-intervention scenario are (i) mother-to-child transmission intervention, which has a baseline coverage of 34 percent of at risk population in 2002, will gradually rise to 70 percent by 2006; (ii) voluntary counseling and testing, which also has a coverage of 34 percent of the at risk population in 2002, would reach 80 percent in 2006; (iii) antiretroviral therapy would have a 90 percent coverage by 2006; and (iv) and sexually transmitted disease prevalence rates will decline by 50 percent by 2006. Though the NSF’s target on each of the programs is 100 percent coverage of all at-risk groups beyond 2009, in view of reservations expressed about implementation capacity and possible program reach, the targets were relaxed for the purpose of simulation, so that, beyond 2006, all interventions remain at 90 percent.

F. Results

24. The demographic impact. The demographic projection suggests that in an AIDS-with-treatment scenario, Botswana’s demographics will improve considerably. The overall population growth rate in 2015 will be 2 percent, compared with 0.9 percent in with-AIDS scenario and 2.9 percent in a no-AIDS scenario (see Figure I.2). New HIV infection rates will start to decline in 2005, and fall below 15,000 per annum by 2015, compared with more than doubling of that number in the with-AIDS scenario. AIDS-related deaths would peak at about 30,000 in 2005 but decline to less than 10,000 by 2015. This contrasts with the 33,000 AIDS-related death projected for 2015 under the with-AIDS scenario.

Figure I.2.
Figure I.2.

Botswana: Demographic Changes in Three AIDS Scenarios, 1991–2015

Citation: IMF Staff Country Reports 2004, 212; 10.5089/9781451806380.002.A001

Source: Spectrum Demographic Projection.

25. Macroeconomic impact. The most remarkable macroeconomic impact is the increase in the overall growth rate of the economy, under the AIDS-with-intervention scenario compared with the with-AIDS scenario. Under the former, by the end of the program in 2008, nonmining GDP is projected to grow at a rate of 4.4 percent, compared with the with-AIDS scenario of 3.7 percent. By 2015, nonmining GDP would grow by 4.3 percent under the AIDS-with-intervention scenario, compared with the 2.5 percent projected for the with-AIDS scenario; however, the former rate is still less than the 5.2 percent projected in the absence of AIDS.

26. The positive performance of GDP arises from the larger labor force, which is projected at 425,000, compared with 320,000 in the with-AIDS scenario. In addition, efficiency and productivity are increased because of the intervention programs. In the program years, the contribution of capital declines (see Table I.4) but by the end of the program, the negative trend begins to reverse.

27. A crucial determinant of the overall outcome is the extent to which Botswana can attract the financial support of development partners in the prosecution of the war against the pandemic. The current results are based on the assumption that 50 percent of the cost would be financed from savings. In the event of a lack of donor support, and a greater reliance on domestic savings than projected, the outlook may be much worse than expected because the negative effect on capital accumulation would be greater.

Table I.3.

Botswana: percentage Contribution to Changes in GDP, 2005–15

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28. The effect on poverty and inequality. Recent estimates of the poor in Botswana indicate that about 47 percent live below the poverty datum line. Botswana’s National Poverty Strategy (2002), recognizes the crucial role played by poverty in the transmission of HIV/AIDS. High prevalence rates among the working population affect the traditional support network. As households spend more of their income on relatives’ illnesses and funeral expenses, they sink more into poverty, and losing family members to HIV/AIDS create a negative income effect. Though improving the condition of the HIV-positive individuals would have salutary effect on poverty incidence, the overall effect is ambiguous since expenditures benefiting the poor could be disproportionately affected, because of the high fiscal outlay for the program, thus worsening the poverty situation.

G. Conclusion: The Policy Challenge

29. In the context of the Botswana NSF, the substantial allocation of resources to a medium-term HIV management program is grounded in the potential impact of the strategy in reversing the impact of the HIV/AIDS on human development and macroeconomic performance. By committing substantial financial resources in the current period, in the long term, HIV-related death rates will be lower, patients would have longer and more productive lives, the number of orphans would be smaller and mother-to-child transmission rates could be considerably reduced.

30. Implementing the program would, however, put pressure on an already overburdened fiscal operation. In order to arrive at the true fiscal implications of the program, the government needs to integrate the National Strategy for Poverty and the NSF into the NDP 9 macroeconomic framework, so as to have a timely, comprehensive overview and overarching strategy to effectively deal with HIV/AIDS. Second, the trade-offs to committing resources to the fight against HIV/AIDS should be carefully weighed. The authorities should bear in mind the intergenerational issues involved in committing current resources to improving the future well-being of the country, a commitment that would have an impact on the development spending in other sectors.

31. The growth possibilities indicate that the high expenditure on the NSF program is justified if approached in an integrated fashion. One possibility open to the government is to prioritize the interventions proposed, based on cost-effectiveness, in meeting the goals of reduced/averted HIV infections. More detailed studies of how falling death rates and prolonged and more productive lives would translate into increased and productive labor force participation and positive effects on savings and investments could then inform the choices to be made. This could provide a basis for the authorities to further expand and update the BIDPA macroeconomic analysis of the impact of HIV/AIDS in Botswana.

Reference

  • Botswana Institute for Development Policy Analysis (BIDPA), 2000, Macroeconomic Impacts of the HIV/AIDS Epidemic in Botswana (Gaborone, Botswana: BIDPA)

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  • Cuddington, John T., 1993: “Modeling the Macroeconomic Impact of AIDS with an Application to Tanzania”, World Bank Economic Review, vol. 7 (May), pp.17389

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  • Green, John H. and others, Botswana: Selected Issues and Statistical Appendix IMF Staff Country Report no 02//243 (Washington: IMF)

  • Haacker, Markus, 2002, “The Economic Consequences of HIV/AIDS in Southern Africa”, IMF Working Paper 02/38. (Washington: IMF)

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  • National AIDS Coordinating Agency (NACA) 2003, Botswana National Strategic Framework for HIV/AIDS 2003–09, (Gaborone, Botswana: NACA).

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  • The Futures Group International: Spectrum AIDS Impact Mode Software.

  • World Bank, 2001, Botswana Selected Development Impact of HIV/AIDS, Macroeconomic Technical Group Africa Region.

1

Prepared by Iyabode Masha.

2

See World Bank (2001).

3

The NSF has not yet been issued as a Government policy paper, a prerequisite for its reconciliation with the National Development Plan (NDP 9) and the annual budgets.

4

See Green and others (2002)

5

According to NACA (2003), the private sector, parastatals, and the civil society are expected to implement an agreed Minimum Internal Package for HIV/AIDS prevention. During mission consultation, Debswana Corporation, Botswana Telecommunications, Barclays Bank of Botswana, Standard Chattered Bank, and Botswana Power Corporation, confirmed that they implement comprehensive workplace AIDS policies, some of which extends to their subcontractors. See NACA (2003) for details.

6

List of targets and outcome indicators not exhaustive. See NACA (2003) for details.

7

Following Cuddington (1993), productivity gain is defined as a worker’s experience, proxied by taking the worker’s age and subtracting 15, the assumed age of entry into the labor force. BIDPA’s estimate of the earnings function for Botswana assumes a starting age of 20 years in the formal sector as follows: ρ = δ1 + δ2 (i - 20) + δ3 (i - 20)2, where the δ s are estimated from earnings function of the labor force.

8

In the intervention scenario, higher levels of resources would have to be committed over the program years than in a no-intervention scenario.

9

The Spectrum AIM model is a Windows-based program designed to calculate the demographic consequences of HIV/AIDS; it can be downloaded from www.tfgi.com. 1991–2003 demographic data match the actual values, while the parameter used to generate the remaining years are from UN and U.S. Census Bureau projections. Botswana National Aids Coordinating Agency data were used for epidemiological information for the with-AIDS scenario, and the NSF targets for the AIDS-with-intervention scenario.

Botswana: Selected Issues and Statistical Appendix
Author: International Monetary Fund