Further Results on the Macroeconomic Effects of AIDS: The Dualistic, Labor-Surplus Economy

Abstract

This article generalizes and extends the earlier analyses of Cuddington (1993) and Cuddington and Hancock (forthcoming) by incorporating the presence of underemployment and dual labor markets—considerations that seem particularly important when assessing the likely impact of AIDS in many African countries. The dual-economy simulations of the economic impact of AIDS using Tanzanian data suggest that the macroeconomic consequences of the epidemic are of the same order of magnitude as those obtained using a single-sector, full-employment model: gross domestic product (GDP) is 15 to 25 percent smaller by 2010 than it would have been without AIDS, and per capita GDP is 0 to 10 percent smaller. The output loss from AIDS in the dual-economy framework is roughly the same as the output gain achievable through policies designed to increase labor market flexibility. The exercise is crude, but it suggests that meaningful efforts at economic reform in economies devastated by AIDS may at least ameliorate some of the negative economic effects of the epidemic, although they would certainly not offset its personal and social costs.