What Do We Know About the Impact of AIDS on Cross-Country Income So Far?

Abstract

This paper sheds new light on the impact of AIDS on cross-country income levels. Our empirical analysis uses data for 89 countries spanning the period 1979 to 2000 during which AIDS has spread across the world. We control for a variety of factors that are potentially related to income as suggested by our empirical model and existing related literature. Using the extended (for human capital) Solow model as our baseline empirical specification, we consider cross-sectional and panel estimation. For the full sample it is shown that AIDS has a negative and significant effect on the level of income in both the cross-sectional, and panel estimations. In addition, using data on age groups we find that only the AIDS coefficient corresponding to the age group 16-34 is significant and obtains a negative sign. When we arbitrarily split our full sample into OECD and non-OECD countries, we find that the AIDS coefficient continues to be negative and significant for the non-OECD subsample but not for the OECD subsample. Finally, using Hansen's (2000) endogenous splitting methodology we find evidence in favor of AIDS as a threshold variable. Our main quantitative result is that an increase in AIDS incidence by 1 in 100,000 people is associated with a 0.003% - 0.004% reduction in income per worker.