Tuesday, April 19, 2005
9:30 – 11:00 am, International Monetary Fund, IMF, room 2-530
MEETING NOTES [1] Rachel Winter Jones of the Global Civil Society Team of the World Bank chaired this meeting. Markus Haacker, and Shanta Devarajan presented. Markus Haacker, is an economist with the International Monetary Fund Africa Department. He edited the book, The Macroeconomics of HIV/AIDS. Shanta Devarajan is the chief economist for the World Bank’s South Asia Region and also a contributor to the book. Coming first, Mr. Haacker said the point of his presentation was to discuss mainly how the epidemic of HIV/AIDS affects the core work of IMF. Mr. Devarajan, he explained, would talk about the outlook, the potential development impact of HIV/AIDS over the coming years as the Bank sees it evolving. HIV/AIDS has a devastating impact on health and life expectancy in particular in Africa, Mr. Haacker began. The drop in life expectancy in Africa over the past 15 years is truly exceptional in a global context; the only other occasion in recent history where life expectancy dropped precipitously was related to the transition in Eastern Europe but that had a much smaller impact and was not sustained. Those countries in sub-Saharan Africa with an HIV/AIDS prevalence rate of above 5% have experienced a very substantial decline in life expectancy but also those countries with prevalence below 5% have experienced some drop. In the countries most affected by HIV/AIDS life expectancy has dropped by half and in five of these countries, it is down to levels not experienced since the start of the 20th century. Still, as yet in terms of GDP per capita, HIV/AIDS has not had a similarly negative effect on the economies of those countries. The IMF as an institution is very heavily weighted toward economic policy, but a survey of IMF staff in 2002 showed that they felt it had significant impact on their work and that a better understanding of how HIV/AIDS affects the economies of member governments was needed. The IMF is part of a network of organizations and institutions working on the issue of HIV/AIDS. This network includes the World Bank, and UNAIDS, for example, and in Washington organizations like the Center for Global Development; and all are informing the discussion based on their comparative advantages. All, he said, feel that they need to very rapidly escalate the response to HIV/AIDS. Institutions like the IMF do not have much experience on public health or HIV/AIDS (This book is the first IMF book to focus specifically on a public health issue), and what the IMF is trying to do now is to understand what it means for their work so they will be able to assist other international institutions who play a much more direct role in this area, and governments. What he would talk about, primarily, he said, was the sustainability of government debt which is a core IMF issue and other expenditures related to HIV/AIDS which are frequently subsumed under the response to HIV/AIDS. Turning first to fiscal sustainability, one important measure of fiscal sustainability is the debt/GDP ratio so one measure of the impact of HIV/AIDS in terms of fiscal sustainability is what impact does it have on the kind of deficits that a government can sustain or surpluses that the government needs to run in order to maintain the debt/GDP ratio at a certain level, and HIV/AIDS does have a direct impact on this measure. As the size of the work force, as the size of the economy grows more slowly, the fiscal scope of the government--if it wants to retain a certain debt/GDP ratio--narrows. And he gave an example saying that if the population growth rate falls by one percent that means that there are less people to contribute to GDP and the deficit would then need to be reduced by .5 percent. The other spotlight is the indirect costs of HIV/AIDS and those may be smaller than the costs of scaling up health services but they are disproportionately important to government deficits, if you look at spending decisions that a government has to make, because in many countries highly affected by HIV/AIDS most of the response to HIV/AIDS in the expansion in health services is underwritten by international donors, so, while there are substantial expenses to scaling up the response to HIV/AIDS, there is also a lot of financing that is available for those kinds of expenses. But other kinds of expenses for example social spending would normally be financed out of domestic resources, and there is also the need to consider increases in personnel costs, which come out of increased medical expenses, increased sick leave and other effects of HIV/AIDS on government employees. Over the next month, he said the IMF will be looking at pensions funds. In terms of the macroeconomic effects, HIV/AIDS he said is very asymmetric. There are many people in the economy who are barely affected by the epidemic but there are a large number of households that care for surviving dependents or who have members that fall sick and die, so HIV/AIDS has a very significant impact. One of the key ideas that went into putting together this book was to describe how HIV/AIDS through its impact on the microeconomic level including on enterprises has a significant impact on the macroeconomic level as well Mr. Haacker then took one question. The speaker asked about the calculation of the population growth rate falling and the necessary reduction in debt. He responded by emphasizing that the argument is the ratio of debt over GDP and if the government wants to sustain a certain debt/GDP ratio, if the GDP grows more slowly it has to take a more cautious stance vis-à-vis debt. After more conversation with the speaker, Mr. Haacker further explained that if the GDP growth rate falls by one percent for whatever reason then the government deficit needs to be reduced by 0.5 percent to maintain the same ratio. Shanta Devarajan, in beginning his presentation, pointed out that Mr. Haacker had presented a “fairly gloomy picture” of both the effect of HIV/AIDS on life expectancy and demographics particularly in Africa as well as the potential effects on constraining economic activity in economic growth in these countries. But, Mr. Devarajan said, from his perspective, everything that Mr. Haacker had said was an understatement; that when we look at the long-term economic effects of aids there are effects that we have not yet seen. The devastation could be a type that has never been seen before in human history, he said. First of all, HIV/AIDS, unlike any other epidemic affects young adults, and the unique characteristic of young adults is that they have children. They are in their child bearing and child rearing age, so the effect of getting hit with HIV/AIDS is not just on the victims but potentially on their children, and for example the parents’ ability and incentive to send the children to school. This could disrupt the whole process of human capital transmission from one generation to another. In fact it is worse than that, he said, because the fact that a large number of these parents die when they get HIV/AIDS means that the children are also denied the love and nurturing and life skills that parents provide to their children. It is even worse than that as well because one generation is hit by HIV/AIDS so their children are less educated and also miss out on life skills so they are less able to provide for their children’s education, and their children are less likely to be able to provide for their children and so on: there is the risk of a vicious cycle of a “poverty track” where an economy that was once growing because of human capital development starts declining. In order to look at whether or not this was realistic, Mr. Devarajan said that he started to look at the data, to see whether in some high prevalence countries you could actually have this effect taking place, and, he emphasized, this is not something that is being observed today but it is something that may be observed in the future and he looked at South Africa, which is one of the higher prevalence countries. Looking at the impact on demographics, he explained the following: taking 1990 as the year before the aids epidemic hit, he looked at the probability of orphan hood. The data showed that the probability of orphan hood was less than one percent, and the probability that both parents were alive was 86%. Then looking at the actual behavior of the epidemic he extrapolated out to 2010 and the probability that both parents were alive was down to 30% and the probability of orphan hood was up to 20%. So, he said, this is one of the demographic effects, and asked, what about the economic effects? Using an overlapping generation’s model, he extrapolated starting with the period from 1960 to 1990 and running forward to 2080. This was an economy he said that was on a fairly reasonable growth rate, 3-4 %. With no aids you have an economy where household incomes basically quadruple in by the year 2080. With aids, and not doing anything, you get a very different story with an economy that shrinks to 50% its original size--basically economic collapse. While this is a basically conceptual story, using South Africa data, you get what he called this low equilibrium trap. He said in thinking about what to do about this there were basically two points to keep in mind. The investments that South Africa has to make are not all in the health sector, they may be in the education sector, and maybe we should be thinking, he said about giving education vouchers for orphans so that they can actually stay in school. But he also figured that the scale of the amount you need in order to stop this is substantial. He figures it is about 4% of GDP today in order to prevent this collapse 80 years from now in South Africa.
Discussion: The first speaker, from Save the Children, said the numbers were quite “horrific.” How, he asked, are these figures being received both within the IMF and the countries you are talking to. He said he couldn’t think of any finance minister in the world that would take that figure very well. Mr. Devarajan responded by saying that he did not say who should or would provide that 4% of GDP. He thought it should be possible to mobilize some combination of donor resources, international resources and domestic resources that could amount to 4% of GDP. The problem was that when the paper was published, the ministers were upset because they felt it would deter foreign investment. A second speaker said, using the case of Botswana, that we don’t have to wait 80 years, that over a very short time horizon, you can see the effects. The third speaker from Action Aid referred to a report called the Joint Learning Initiative, which did an analysis of the world health workforces and concluded that sub-Saharan African Countries would need to triple the size of their health workforces. How does that mesh with the 4% GDP? He also asked if the IMF saw any “wiggle room” in addressing the possibility of looser fiscal policies in order to allow for more expansionary policies that would begin to finance that tripling of the workforce or do you agree with that analysis that the health workforce needs to be tripled, he asked? Mr. Devarajan: Regarding the workforce, the 4% figure did not specify that it was all to be spent on health in fact it is very important that a lot of it be spent on education and on the prevention side. Even on the education side you have a problem because teachers are dying of aids, but he said, he was focusing on the demand side, making sure the children go to school. The dialogue between the Action Aid representative and Mr. Devarajan continued: Speaker: you also need to educate more doctors and health workers. Mr. Devarajan agreed, it is necessary to educate more doctors and health workers but there is also the possibility of importing doctors and even teachers for that matter. There is an international market for this. Mr. Devarajan also said that it might be worth running a fiscal deficit if it were possible to prevent the disaster. The question, he said, really came down to this: would it buy you more growth? The speaker talked about how the Uganda finance ministry was unwilling to accept a $52 million grant from the Global Fund a couple of years ago, and that the Uganda IMF team had explained that it was related to concern about the possibility of an inflationary response from hiring more doctors and health workers. Mr. Devarajan: it is really not about inflation. He said they had looked into the Global Fund issue, when they were doing the World Development Report in 2004. He said the Ugandan system of public expenditure management was good and that the Global Fund had come in after they had determined their budget and the Ugandan ministry had said they welcomed the money but they would determine how is would be spent. The minister of finance had a broader view than the Global Fund. The discussion continued and one of the significant points made by Mr. Devarajan was partly a question: does a reduction in the fiscal deficit lead to higher growth or lower growth across a large number of countries at different points in time? The evidence is all over the place, he said. There was also a question to Mr. Devarajan, about the school enrollment figures that he had used, because the present enrollment rates in South Africa are higher than his model suggested. He then explained that the model was assuming that there were full blown aids after 1990. He also said that the completion rates were lower than mentioned and that the model was presuming that nothing was being done to curb the disease. As a final question to Mr. Devarajan, the representative of Action Aid said he would be going to Doctors without Borders in Europe later in the week and he wanted to make sure that he had Mr. Devarajan’s perspective clear. So you are saying, he said, that you think that the wage bill increases that will probably go along with hiring additional teachers and doctors and health workers is sufficient to the size needed to fight aids effective, that that can be done under the current monetary policies. Mr. Devarajan, said that no. Action Aid: So what kinds of changes to monetary policy do you envision making that possible? Mr. Devarajan: This is specific to South Africa because that 4% number is for South Africa; the position is that something in the order of 4% additional spending is going to be necessary to prevent economic collapse, and financing for that 4% is likely to come from a combination of expansionary fiscal policy, from the central bank and from foreign aid. And some of it could be in the form of grants. Ms. Winter Jones then asked Mr. Haacker if he had anything to add. Mr. Haacker: returning to the issue of hiring doctors from abroad said that there was in sub-Saharan Africa, a very important migration and from other countries as well, like Cuba. There is high mobility in the health field. Following up on the discussion of fiscal policy and Mr. Devarajan’s point about deficits and growth: the IMF, in terms of macroeconomic management is supporting fiscal policies that are in some way sustainable. And he used what he called a simple example because of the focus on debt/GDP ratios. The most important example for that is countries in post conflict situations, he said, and there have been IMF programs that envisage budget deficits exceeding 20% as the country, with substantial help from international donors, sets about rebuilding their infrastructure, rebuilding there economies, and as they come out of the post conflict, the government, with the advice from the IMF, set about reducing that budget deficit to levels that can be sustained in the longer run. About the link between fiscal policies, monetary policies and HIV/AIDS related expenditures: There is not really a choice about how much to invest in HIV/AIDS because some of the demands for additional services will come if the country does not act forcefully to respond to the epidemic. There is actually a chapter in the book he said that looks at the macroeconomic impact and the fiscal impact of the response to HIV/AIDS through savings caused by reduced infection rates as those savings translate into lower demand for health services and they also mitigate the effects of HIV/AIDS on GDP growth. Regarding fiscal policy and monetary policy, he said, he thought the key to understanding the issue was that responding to the epidemic implies a certain decision on how to allocate resources as through the fiscal budget or, if part of the HIV/AIDS is financed though international organizations, they can also be spent outside the budget through some mechanisms, but thinking about the government budget those additional expenditures translate into demand for services and they could have an inflationary impact if the country actually does not have the capacity to provide those services. The monetary policy angle comes when you discuss the financing of the allocation of these additional resources and there are several ways to finance the response to HIV/AIDS. One is through external aid, the other is through monetary policy and the third way is by increasing taxation or reallocation of expenditures within the budget and the key point about financing is the looser monetary policy, through inflation basically as opposed to financing it through increased taxes or through reallocation if expenditures is that inflation is a tax which is particularly geared toward the poor. So if to the extent that HIV/AIDS is financed domestically, the IMF would advocate finding other ways to finance it than just printing money. The core of the discussion is how to mesh this rapid transformation of health service in sub-Saharan Africa and how to transform health service to help improve their efficiency. Health services in many countries in sub-Saharan Africa have been very inefficient in the past. Speaker: Are you suggesting the only things that is necessary are to improve those inefficiencies or is it not true that also in terms of order of magnitude of actual real number more doctors and health workers and nurses will be needed in the countryside than currently exist. Mr. Haacker answered in the affirmative, that more doctors and health workers and nurses will be needed. Speaker: So that will be an increase in the wage bill and that will increase the money supply at some point? Mr. Haacker, disagreed, saying not necessarily, it depends on how you finance it. If you finance it through reallocation within the government budget there would be no effect. Speaker: What if there were substantial increases in donor grants even if the financing was sustainable and in grant form there is still going to be the effect of increased spending going on in the economy? Mr. Haacker agreed that it was possible to get some imbalances, but given the magnitude involved ex ante those would likely be secondary and what was really being talked about was say one percent of GDP smaller magnitudes than in many other cases where there were those imbalances. Other speakers made several references to a meeting which had been held the day before, sponsored by the Center for Global Development, which related to these issues and Mr. Haacker mentioned that the Center for Global Development would almost certainly make the proceedings available to the public. After thanking the participants, Ms. Winter Jones closed the meeting.
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