Working Paper 148 - Role of Fiscal Policy in Tackling the HIV/AIDS Epidemic in Southern Africa
Description This paper investigates the impact of fiscal policy on reducing the HIV/AIDS incidence rates in Southern Africa. In particular, it studies the welfare impact of different taxation and debt paths in these countries in reducing the HIV/AIDS prevalence rates. Our results show that, acting optimally has not only positive societal welfare effect but also positive fiscal effects. There is evidence from that region that antiretroviral therapy (ART) dramatically slows down the progression of HIV infection and AIDS by sharply depressing viral load, improving the cluster of differentiation (CD4) cell counts, and delaying clinical progression to AIDS and fatal complications. However, financing these ART programs is very challenging. The question then is: if these countries use public revenues to fund the intervention against HIV/AIDS, will there not be increase in their debt burden or some negative externalities on other public funded programs? We use a calibrated model, an extension of Robalino et al (2002), in order to capture the fiscal implications of government interventions against HIV/AIDS epidemics. Capital stock level as well as labor force are assumed to be optimally chosen by a unique representative firm. HIV/AIDS affects the economy through the labor force and labor productivity. The government raises taxes to finance its intervention against the HIV/AIDS epidemics and chooses the optimal reduction in the prevalence rate that maximizes the inter-temporal societal welfare. Data on demographic, epidemiologic and macroeconomic indicators used in this study are from the World Bank’s 2011 World Development Indicators (WDI). The main contribution of this paper is that it demonstrates the cost-effectiveness of the fiscal tool in the fight against HIV/AIDS if optimally used during the next decade. By acting optimally, Lesotho, Botswana and Swaziland could respectively alleviate their debt burden by around 1%, 5% and 13% of GDP, respectively, while maximizing simultaneously the inter-temporal societal welfare. This suggests that their governments should not be reluctant in using the fiscal tool to fight HIV/AIDS due to fear of an increase in public debt. One of the most important implications of our results therefore is that African countries can make much better use of their own resources to fund development projects, by increasing tax revenues. This doesn’t necessarily mean increasing tax rates, but making the tax collection system more efficient, improving general tax administration and extending the tax base. Second, optimal intervention leads to early sharp reductions in the prevalence rate, stressing the urgency of increasing expenditures on the expensive but cost-effective ART programs. Traditional fight against AIDS includes mother to child transmission prevention, condom distribution, information campaigns and counseling. But implementing these “cheap” interventions without the ART interventions is fiscally worse than the no-intervention and less macro-economically efficient than the full ART intervention case. Again, the global health agenda in the coming decade will also be about sustainable delivery of the high-impact interventions that were previously supported by development partners. It is worth noting that we have been pessimistic about intervention costs and that our approach to measuring societal welfare omits some important negative consequences of HIV/AIDS for Southern Africa such as increases in the number of orphans and human suffering of the infected. Thus estimates of welfare gains from HIV/AIDS reductions in our paper are likely to be underestimated, underscoring further the importance of immediate and optimal government interventions.