Modelling the macroeconomic implications of a generalized AIDS epidemic in the Russian Federation

The collapse of the Soviet Union in 1989 produced dramatic economic and social dislocation. Unable to cope with such rapid change, the Russian population experienced an unprecedented rise in mortality rates in just five years from 1990 through 1995. Coupled with declining fertility, the stage has been set for a trajectory of population decline not expected to recover for at least fifty years. Russia now faces the additional burden of a burgeoning HIV/AIDS epidemic. Though currently estimated at 1% or less, Russia’s adult HIV prevalence rates have nearly doubled each year over the last several, a growth rate considered the highest in the world. While it is still much too early to make confident predictions about the epidemiological path of HIV in Russia, indications are mounting that the epidemic could escape its current concentration among intravenous drug users and commercial sex-workers. Levels of STI’s and tuberculosis, established cofactors of HIV incidence, have skyrocketed with the break down of traditional coping mechanisms. The male-to-female incidence ratio is dropping, another warning sign of generalization. Indeed, the head of the Russian Federal AIDS Center recently warned of the possibility of an ‘African scenario’ resulting in adult prevalence rates of 8% or more in the coming decade. Within the context of constrained budgets, the costs of inactivity must be weighed against those of policy interventions if public resources are to be allocated efficiently. It is therefore instructive to examine the macroeconomic implications of the epidemic should it generalize into the sort of heterosexually transmitted epidemic seen in Latin American and the Caribbean or, at the extreme end, Sub-Saharan Africa. We do so based on illustrative demographic projections, assuming Low, Medium and High HIV epidemiological paths. Adult prevalence reaches 3%, 6% and 8%, respectively, within 20 years before recovering. We construct two aggregative growth models, Solow and Ramsey, and a CGE model based on a 1997 multi-sector social accounting matrix of the Russian economy. We introduce AIDS related shocks in labor supply and productivity, as well as health care and social insurance dissavings, based on the results of our demographic modeling. We further
examine the sensitivity of impact to the endogeneity of savings and investment decisions based on economic agents’ ‘rational expectations’ about the future within the Ramsey framework. Results suggest that aggregate demographic and macroeconomic impacts could be severe and sustained. Under the medium scenario, average life expectancy falls from 76.8 to 65.4, or -11.4 years (-14.8%), by 2029.
Population falls by 8.2% to 18% in the long run, depending on prevalence assumptions, and labor measured inefficiency units shrinks by 6% to 11% despite exogenous technological growth. Steady-state GDP levels are reduced approximately 6% to 14% by 2040, depending on scenario. Impact on per-capita GDP levels is, however, muted and temporary, falling 0.5% at most for several decades before recovering and turning positive in some scenarios. As a result, the Ramsey model does not provide significantly different steady-state
outcomes, though transitional variation does occur. We conclude that the overall macroeconomy declines to a far greater extent than average living standards as narrowly defined by per-capita income. The CGE model, however, suggests that sectoral impacts could be quite severe. Capital intensive, extractive industries appear particularly vulnerable in the steady-state open economy, with international capital mobility.
Loss of domestic capital productivity generates capital flight, reducing Russia’s domestic stock by 3.5% to 8.8%. This results in dramatic declines in domestic production, though wage rates rise on the order of 1.5% to 5.4%, depending on skill level and scenario. In summary, we have presented a variety of macroeconomic and sectoral lenses through which potential implications of a generalized AIDS epidemic may be viewed. Though our analysis is based on necessarily strong assumptions about the evolution of HIV prevalence in Russia, the employment of low, medium and high scenarios tests the sensitivity of economic outcomes to a range of prevalence rates.
Even ignoring the devastating human cost, our results underline the potential for significant and sustained impact, at both the macroeconomic and sectoral levels, should Russia’s HIV/AIDS epidemic continue to thrive unchecked.

• http://webpages.charter.net/avery/READINGS/documents/AIDS-Russia.pdf