Bachelor Thesis International Economics and Finance

Transcription

1 Bachelor Thesis International Economics and Finance The Impact of HIV/AIDS on the demand for education July 2007 J.H. Timmers Supervisor: Mrs. J. Lammers Tilburg University 1

2 TABLE OF CONTENTS Chapter 1: Introduction 1.1 Introduction Purpose and Problem Statement Research Questions Structure of the Thesis 5 Chapter 2: Demand for Education 2.1 Introduction Expected Consequences of HIV/AIDS on the Demand for Education Time of Infection and Demand for Education Fertility Rate Conclusion 15 Chapter 3: The Influence of HIV/AIDS 3.1 Introduction Present Value of a Human Capital Investment The Schooling Model The Influence of HIV/AIDS on the Schooling Model The Influence of HIV/AIDS on the Income The Influence of HIV/AIDS on the Discount Rate The Present Value for Not-Infected People Conclusion 22 Chapter 4: The Imperfections of the Model 4.1 Introduction Imperfections of the Model Orphans and the PV Principle Conclusion 27 Chapter 5: Conclusion Conclusion 28 References 30 2

3 CHAPTER 1 INTRODUCTION 1.1 Introduction The HIV/AIDS epidemic is one of the biggest problems faced by countries in Sub Saharan Africa (SSA). In 2005, an estimated 38.6 million people are living with HIV worldwide, and among the infected people 24 million live in SSA. Worldwide around 4.1 million became newly infected with HIV, and 2.7 million of these newly infected live in SSA. Since SSA only captures 10% of world s population, the scale of the AIDS epidemic is enormous in this area (World Bank; 2002). Education needs high priority in a world afflicted by HIV/AIDS. This is because the education system that supplies a nation s future is being gravely threatened by the HIV/AIDS epidemic (Worldbank; 2001). The important connection between HIV/AIDS and education, and their influence on the economic situation in a country is shown in figure 1.1. It is a vicious circle; when the HIV prevalence worsens, the quality and quantity of education is expected to go down for two reasons. First, more children die and more become too ill to follow education. Second, teacher death increases, and infected teachers will be more absent, leading to a lower quality of human capital. As a result the number of skilled workers will go down. Hence, it will be harder to become a self-sustaining country, to be innovative and adopt new technologies. This has a negative influence on the economic growth, resulting in less money available for the education sector, and again, this has a negative influence on the level of education and health standards. HIV prevalence worsens Public budget for health/education dries up. Teacher death increase, teacher quality declines, orphans and outof-school youth increase. Cost of education increases. Economic growth declines. Illiteracy increases, quality of human capital deteriorates. Skilled workforce shrinks Country s ability to compete in a knowledge economy suffers. Figure 1.1 HIV/AIDS and education (Source; World Bank 2002). 3

4 Another reason why education is important is because good basic education ranks among the most effective means of HIV prevention (World Bank; 2001). Schools and teachers can provide children with the knowledge, values and skills with which to make healthy decisions and bring about healthy behaviour (Meyer; 2003; 4). In Zambia young women with secondary education were less likely to be HIV-positive than those who had not received secondary education (Vandemoortele and Delamonica; 2000). When people are able to prevent themselves from getting infected by HIV, this will lead to less child and teacher death, and to less teacher absenteeism and less student dropouts. Reducing the spread likely increases both quality and quantity for education. Resulting in an improvement of the quality of the human capital, and in a more skilled workforce. The early costs of HIV/AIDS to the education sector are large. With many countries providing extensive sick leave benefits to infected teachers, long term absenteeism imposes a serious burden on education budgets while constraining funds for replacement teachers (Kelly; 2000). This makes education more expensive. Especially the low-income families may have difficulties paying the school tuition fees, if the higher costs are reflected in higher tuition fees. Also, HIV affected households may have high medical costs and may have to reallocate their income from regular consumption towards medicines, reducing the demand for education. As described above, education is an important topic in countries afflicted by HIV/AIDS. First, education can play an important role in preventing people getting infected by HIV. Second, a well performing education system will probably lead to an improvement in the human capital, and hence, to more economic growth. Therefore, this paper discusses how HIV/AIDS influences the education sector, and in particular the impact on the demand for education. 1.2 Purpose and Problem statement HIV/AIDS has a negative influence on the education sector. How does HIV influence the education sector, or in particular: What is the impact of HIV/AIDS on the demand for education in Sub-Saharan Africa? By demand for education, is meant the enrolment in primary, secondary and tertiary education, provided by the government. Furthermore, we assume children finish primary education at an age of 12; secondary education at an age of 18; and tertiary education at an age of 23. This research does not include private education. 4

5 1.3 Research Questions The problem statement is divided into the following sub-questions; 1. What happens to the demand for education in SSA countries afflicted by HIV/AIDS? 2. What is the influence of HIV/AIDS on the financial trade offs in deciding whether to continue school or not? 3. What are the imperfections of the model? 1.4 Structure of the Thesis This paper is a descriptive research, the method used to do the research is a review of existing literature. The remainder of the thesis is structured as follows. Chapter 2 discusses the expected influence of HIV/AIDS on the demand for education and compares this to the recent trends. The next chapter describes a model in which the trade-offs people make between continuing school or not, are discussed. This is a pure economic model in which the influence of HIV/AIDS on the economic factors is studied, such as income, the costs and the discount rate, and how these influence the demand for education. The subsequent chapter discusses the imperfections of the model, and focuses on the situation of orphans. The last chapter summarizes the conclusions from the previous chapters and gives an overall conclusion. 5

6 CHAPTER 2 DEMAND FOR EDUCATION What happens with the demand for education in SSA countries afflicted by HIV/AIDS? 2.1 Introduction This chapter studies how the demand for education is afflicted by HIV/AIDS. Section 2.2 discusses how HIV/AIDS could have a negative impact on the demand, and it also discusses how HIV/AIDS could have a positive impact on the demand for education. The subsequent section describes 4 types of infection. These are, mother-to-child transmission, breastfeeding, unsafe medical injections and infection through rape. This section also discusses the change in demand for education between in SSA, and tries to give explanations for this. Section 2.4 studies the role of the fertility rate, and the last section summarizes the chapter 2.2 Expected consequences of HIV/AIDS on the demand for education Demand for education falls HIV/AIDS is expected to reduce the demand for education, as can be seen in figure 2.1. It is expected that more people die and less children will be born, and because the mortality rate for children increases with the presence of HIV/AIDS. An estimated 3.8 million children have been infected with HIV since the epidemic began, and more than two-thirds have died. UNAIDS estimates that in 1999, 570,000 children under the age of 15 became infected with HIV since the epidemic began, and that 330,000 to 670,000 children under 14 have died of AIDS (UNAIDS; 2000a). Thus, the total amount of children to educate is expected to be less, than in the absence of HIV/AIDS (figure 2.1). 6

7 Figure 2.1: Primary school net enrolment ratio in presence and absence of HIV/AIDS for Zambia and Burkina Faso, (Worldbank; 2002) Figure 2.2. Impact of HIV/AIDS on demand for education (Desai et al.;2006) 7

8 Cost of education There should be made a distinction between two kinds of costs, the direct costs and the indirect costs. Both are expected to increase, in the presence of HIV/AIDS, causing a fall in demand for education. Figure 2.2 pictures the influence of HIV/AIDS on the number of vulnerable children (which increases) who have restricted access to school, and the number of children to educate (which falls). Vulnerable children are for example orphans, which are discussed in more detail in chapter 4. When orphans do not get any financial or/and social support, it is more likely they will quit school. First, they are probably not able to pay for the costs of education. Second, they do not have time to attend school since they have to take care for their own income. Another group of vulnerable children consists of children who have to take care for ill family members, instead of attending school. The opportunity costs, such as foregone earnings, of attending school are apparently too high. Thus, HIV/AIDS not only affects infected people but it has a negative externality on not-infected people as well. Besides these opportunity costs, there are also direct costs, e.g. tuition fees. These are increasing as well, because with many countries providing extensive sick leave benefits to teachers, long term absenteeism can impose a serious burden on education budgets while constraining funds for replacement teachers (Kelly;2000; UNAIDS;2000b). This will probably lead to higher direct costs causing children to quit school. Also, parents who are infected by HIV will consider a loss in income, because they are too ill to work and drop out of the labour market. Education may become too expensive and as a result their children have to quit school (Steinberg; 2002). Demand for education increases Although figure 2.1 expects a decrease in demand for primary education, demand could increase in the presence of HIV/AIDS. When the expected increasing costs of education are not an impediment to invest in human capital, people may demand for more education. The supply of workers is likely to decrease due to HIV/AIDS, and people may realize they have a higher probability of getting a job with a decent income, if they finished a certain level of education. 2.3 Time of infection and demand for education This paper distinguishes between several levels of education, namely; primary, secondary and tertiary education. The effect of HIV on the demand for education is likely to be different for someone who is infected with HIV through mother-to-child transmission, compared to someone who is infected when he is 10 years old. This is because HIV/AIDS is a slowmoving disease. Thus, the influence of HIV/AIDS on demand for a particular type of education also depends at what stage children get infected. Figure 2.3 shows the profile of someone infected by HIV. 8

9 Figure 2.3 profile of an HIV infection (source: Pease and Bull;2004) Within a few weeks after being infected, the virus multiplies to high levels and is easily detectable in blood. The immune system responds at this time and brings circulating viral levels down to the point that they are undetectable. This asymptomatic phase lasts several years. Eventually (typically 8 years into the infection), the person develops AIDS, which is fatal unless successfully treated. Infected people will live around 10 years after infection (Bull and Pease;2004). This shows that HIV/AIDS can be seen as a slowmoving disease. Therefore, to connect HIV/AIDS and demand for education it is important when someone gets infected. For example, consider a child who was born with HIV or someone who contracted HIV at a higher age. The child born with HIV may face the consequences of the disease when he follows primary education, he becomes too ill and therefore has to quit school. The child who got infected at a higher age, say 10, may face the consequences of the disease at a much higher age. He can follow primary education without being any problem, but becomes too ill when following secondary education and then dropout. Although little children are not sexually active, there are other ways how they can get infected besides mother-to-child transmission. Another way how children can get infected is through breastfeeding. If a child is born not-infected, but it gets breastfeeding from an infected women, this increases the risk for the child of getting infected around 15% (Dunn et al.; 1992). Most mothers want to give their child breastfeeding, because it is optimal for their growth and health. The risk of getting infected is outweighted by the benefits of breastfeeding (Rollins; 2007). A third way how lots of children get infected is through unsafe medical injections, this happens when syringes are re-used without being sterilized properly or without being sterilized at all. (Gisselqist et al; 2003a). The danger is especially great because of the extensive, often unnecessary and irrational use of injections in developing countries. Studies have estimated that as many as 70-90% of injections are unnecessary. A study in South Africa found high levels of HIV in children 2-14 years, about 70% of which could not be explained by mother-to-child transmission. Low levels of sexual experience for 9

10 these children suggest that many of these infections may have been caused by unsafe injections and other ways of medical transmission (such as blood transfusion) (Gisselquist et al.; 2003b). A fourth way how children get infected is through sexual abuse and rape. In some regions, there is a myth that HIV can be cured through sex with a virgin, this has led to a large number of young rape victims (Worldbank; 2001). Demand for primary education is most hurt when children are infected when they are born or infected through breastfeeding. When these children get ill, they have to drop out. Assume that infected people will live for another 10 years (without treatment), those infected through mother-to-child transmission will not be able to follow secondary or tertiary education, because they are likely to die before they can enter this kind of education. The demand for secondary and tertiary education will decrease even more because children can also get infected through unsafe injections or because of rape. In this case children will get ill at a higher age. They will not (or barely) face difficulties when attending primary education but become too ill when attending secondary or tertiary education and then drop out. As the discussion suggests, only taking into account the types of infection (and forget for example about the increasing costs of education); demand for secondary and tertiary will be more affected than demand for primary education. What happens with enrolment in reality Figure 2.4a shows demand for primary education increased in most SSA countries between 1999 and 2004, except for Malawi, Togo and South Africa. Figure 2.5b pictures the demand for secondary education. Again, in most countries demand increased, except in Malawi, Zimbabwe and Swaziland. Figure 2.5c shows an increase in tertiary education for all countries. This is exactly what the second approach in 2.2 predicted; people will demand for more education. However, these figures do not show how large the demand would be in the absence of HIV/AIDS. Therefore, these figures are not sufficient enough to judge which approach from section 2.2 is correct. The theory of the type of infection suggested that the demand for secondary and tertiary would be more affected than demand for primary education. This is not really supported by the graphs, which show a great change in demand for primary education in most countries as in demand for secondary and tertiary education. However, again, these graphs do not show how large the demand would be for education without HIV. One reason for the great change in the demand for primary education in most SSA countries, is probably the introduction of education supporting programmes in much SSA countries, implemented by governments or organizations like UNICEF. A reason why such programmes are implemented, is because education is one of the most effective means of HIV prevention (World Bank; 2001). Also, one of the most important Millennium Development Goals was to achieve universal primary education for all boys and girls (United Nations, 2005). 10

11 Figure 2.4a: Changes in primary net enrolment ratios between 1999 and 2004 (source; UNESCO; 2007). Figure 2.4b: change in secondary gross enrolment ratios between 1999 and 2004 (source; UNESCO; 2007). 11

12 Figure 2.4c: Changes in tertiary gross enrolment ratios between 1999 and 2004 (source; UNESCO; 2007). 2.4 Fertility rate In section 2.2 the first approach expected the demand to go down in the presence of HIV. One of the reasons this did not happen could be the high fertility rate in SSA, which could offset the decrease in demand for education caused by HIV/AIDS. Figure 2.5 lists the countries who considered a fall in primary education (figure 2.4a). To see the influence of the fertility rate, a comparison is made between these countries and countries who considered an increase in demand, with almost the same HIV prevalence rate. 12

13 Figure 2.5: The prevalence rate 1 and fertility rate 2 for countries who considered a decrease in demand and for countries who considered an increase in demand. (source; data retrieved from Human Development Report 2006) Countries who considered a fall in Prevalence Rate % Fertility Rate Countries who considered an increase Prevalence Rate % Fertility Rate demand 3 in demand South Africa Zambia Malawi Mozambique Togo Equatorial Guinea Comparing South Africa with Zambia, and Togo with Equatorial Guinea, would suggest there is a relationship between a higher fertility rate and higher demand for education, however this is not supported by the comparison between Malawi and Mozambique. Hence, there could be a relationship, but an increase in demand cannot be explained solely by the fertility rate. Figure 2.6 shows the predicted expected percentage change in school age (5-14) population between 2000 and In western and central Africa the growth rate for the school-age population could still be as high as 30%. (Desai et al. 2006). In most SSA countries the relationship between HIV prevalence and the change in size of the 5 to 14 year-old age group tends to be weak. Even Swaziland, the country with the highest prevalence rate today, considers an increase. Estimates by the US Bureau of Census suggest that only 6 of 26 countries worst affected by AIDS will show an actual reduction in the school-age population by 2015 (UNAIDS, 2000c). These countries are Botswana, Ghana, Kenya, Rwanda, South Africa and Zimbabwe. In South Africa and Zimbabwe, the number of children of primary school age will be 20 percent lower, by 2015, than pre-aids projections (UNAIDS, 2000c). 1 HIV prevalence rate in Fertility rate between 2000 and Countries who considered an actual fall in demand between 1999 and

14 Figure Figure : projected predicted fertility percentage rates in change African in regions school age (United (5-14) Nations; population 2005) between 2000 and (Worldbank, 2002) Again, the relationship between the demand for education and the fertility rate is studied, between two countries with nearly the same HIV prevalence rate. Figure 2.7 pictures the countries who will consider a fall in primary school-age population, and those who will consider an increase. This figure assumes the predicted school-age population change in figure 2.6, will be the actual change in demand for primary education between 2000 and Figure 2.7: The prevalence rate 4 and fertility rate 5 for countries who considered a decrease in demand and for countries who considered an increase in demand (source; data retrieved from Human Development Report 2006). Countries who will consider a fall in Prevalence Rate % Fertility Rate Countries who will consider an increase in Prevalence Rate % Fertility Rate demand ( ) demand ( ) Botswana Lesotho South Africa Zambia Kenya Uganda Rwanda Togo Ghana Burkina Faso HIV prevalence rate in Expected fertility rate on average between 2000 and 2015 (source; Worldbank; 2005) 6 Zimbabwe is not included, because the unstable political situation may have caused the decline in demand for education. 14

15 All countries who will consider an increase in demand have a higher fertility rate compared to countries who will consider a decrease in demand, except for Togo who has a smaller fertility rate as Rwanda. Assuming, almost, equal prevalence rates between the compared countries. Although, the differences in demand are in some cases so large, it is unlikely this can only be explained by a difference in the fertility rate. Hence, without using a real statistical mechanism, there could be a weak relationship between demand for education and the fertility rate. Moreover, it is difficult to make correct predictions about the demand for education over such a long period. For example, the World Bank failed in 2002 to make a correct prediction about the demand for primary education in Zambia in the period 1999 and 2004 (figure 2.1). They expected a decrease in demand, while in reality there was almost an increase of 20% (figure2.4a). 2.5 Conclusion In summary, this chapter described the influence of HIV/AIDS on the demand for education. Section 2.2 discusses two approaches. The first approach suggests demand for education would fall in the presence of HIV/AIDS, because of the increasing direct and indirect costs of education. The second approach suggests demand for education is expected to increase, because people expect to earn higher wages if they finish a respectable amount of schooling. Section 2.3 showed that HIV/AIDS is a slowmoving disease, the moment at which children get infected is expected to play a role in their demand for education. There is made a distinction between 4 types of infections; mother-to-child transmission; breastfeeding; unsafe medical injections and through rape. Secondary and tertiary are expected to be more affected, however this can not be explained by the figures 2.4 However, in the period the greatest changes are in demand for primary education. A reason for this could be the introduction of primary education programmes, which stimulates the demand. The last section of this chapter studied the relationship between demand for education and the fertility rate. There seems to be a weak relationship. Furthermore, it is very difficult to make predictions about the demand for education, especially over a longer period. 15

16 CHAPTER 3 THE INFLUENCE OF HIV/AIDS What is the influence of HIV/AIDS on the financial trade offs in deciding whether to continue school or not? 3.1 Introduction This chapter presents a model about how people make financial trade-offs in deciding whether to continue school. Section 3.2 and 3.3 give a description of the model. After the model is introduced, the influence of HIV/AIDS on the model is studied. Section 3.4 describes the influence of HIV on the direct and indirect costs of education. Section 3.5 studies the effect of HIV/AIDS on income. Section 3.6 focuses on how HIV/AIDS affects the discount rate. The subsequent section focuses on how people who are not-infected act in this model. The last section summarizes the outcome of the model and discusses the effect of demand on education. 3.2 Present Value of a Human Capital Investment Any study of an investment decision must contrast expenditures and receipts incurred at different time periods. This paper considers human capital investments. An investor must be able to calculate the returns to the investment by comparing the current cost with the future returns. With the help of the present value (PV) we can compare amounts spent and received in different time periods. Y-C PV hs = Σ (1+r) t if PV > 0 it is profitable to follow secondary education. Y represents the discounted income after high school education, C represents the costs. r is the discount rate, and the superscript t represents the number of discounted years. Future payments are discounted to make it comparable to a certain currency today. (Borjas; 2005; 242). 3.3 The Schooling Model Assume that workers acquire the education level that maximises the present value of lifetime earnings. Consider the situation faced by an 18-years old man from an SSA. He has just finished secondary school and is now contemplating whether to start working or to follow tertiary education. Figure 3.1 illustrates the economic trade off involved in the man s decision. The figure shows the age-earnings profile. That is, the wage path during his life time associated with each alternative. Upon entering the 16

17 labour market, high school graduates earn W hs euros and these earnings are increasing until the retirement age, which occurs when the worker becomes 65. When choosing to continue school, he gives up W hs euros in labour earnings, and incurs direct costs of H euros to cover tuition, books and fees. After graduation, he earns W u euros until the retirement age of 65. Assume this man has complete information, he can now make the PV calculation and decide what is most profitable for him. When benefits are higher than the total costs, the decision to continue school is made, and the other way around (Borjas; 2005; 241) Figure 3.1: Age-earnings Profile (Source: Psacharopoulos; 1995; 3) Earnings Tertiary Benefits W u Secondary W hs Costs Direct Cost H 18 Time (Years) 5 42 The lines in this so-called schooling model are built on a few assumptions. First, the more years of schooling (thus the higher educated), the higher the earnings. This results in an upward sloping line, and explains why it is not a horizontal line. Second, the slope of the wage schooling locus tells us by how much a worker s earnings would increase if he were to obtain one more year of schooling. Therefore, the slope will be closely related to the rate of return to education. Third, the law of diminishing returns holds here. Each extra year of schooling generates less additional knowledge and lower additional earnings than previous years (Borjas; 2005; ). In the rest of this paper, the lines and slopes are taken as given. 17

18 3.4 The Influence of HIV/AIDS on the Schooling Model Assume the 18 year old man is infected with HIV. Again, he will make a decision according to present value principle. This section and the next two section study the impact of HIV/AIDS on the main determinants of the PV principle, which area the costs (direct and indirect), income earned in a lifetime and the discount rate. First, the influence of HIV/AIDS on the costs is studied. Direct costs As stated in the introduction of this paper, the direct costs of education are rising. This is because the replacement costs of died teachers are increasing and governments have to provide extensive sick leave benefits. In Swaziland, for example, the theoretical cost of hiring and training teachers to replace those lost to AIDS is estimated to reach US$233 million by 2016, an extremely high cost that exceeds the total government budget for all goods and services (Kelly;2000; UNAIDS;2000b). Since it is very difficult to terminate the services of a teacher who is ill, the education sector needs to carry a currently unknown but large number of non-productive persons. In addition to the high salary costs this implies, there are also the financial costs of replacements, both in the short-term through the hiring of part-time substitutes and in the long-term through the training of additional teachers (Kelly;2000). Zambia has estimated that the epidemic s financial burden on its education sector will amount to some US25$ million, between 2000 and 2010, largely reflecting the costs of increasing the supply of teachers as well as teacher absenteeism. Mozambique s estimate is about twice as much. In both cases the cost of salaries, for absent teachers was some three times the cost of training to replace teachers who had died. This implies that the cost of providing substitute teacher for those who are absent is likely to be a much greater drain on budgets than the cost of training (World Bank; 2002). The empirical evidence shows that the direct costs increase enormously. We assume the rise in the costs is reflected in higher direct costs for the students, tuition fees will increase. Especially for poor people facing HIV it will be harder to meet the increase in costs, because also part of the income is spent on medicines (Desai et al. 2006). Indirect costs Besides, direct costs there are also indirect costs, which may be of even more importance. Indirect costs consist of foregone earnings. Especially when child labor becomes essential to family subsistence, implying a higher opportunity cost of schooling (Desai et al. 2006). Research carried out in Uganda (Menon et al. 1998) found that AIDS-related deaths cause a higher reduction in savings and assets ownership than other types of death. Other opportunity costs are for example the care for an ill family member, which rises in the case of HIV/AIDS (Hilmann; 2004). Hence, HIV/AIDS has a major impact on the direct and indirect cost of education, and this has a negative impact on the PV, which lowers the demand for education. 18

19 3.5 The Influence of HIV/AIDS on the income A person should choose a level of schooling that maximizes the PV of earnings. This means there is a so-called stopping rule where it is optimal to quit school and enter the labor market. Figure 3.2 shows the wage-schooling locus, where the expected earnings according to the years of schooling are pictured. The wage-schooling locus is built on the same assumptions as the lines in the schooling model. Hence, it is upward sloping and has diminishing marginal returns (Borjas; 2005; ). This section studies the impact of HIV/AIDS on lifetime income. It makes a distinction between less income due to absenteeism and lower productivity, and less income due to a shorter lifetime. Absenteeism and lower productivity A large part of the infected people in SSA lives in rural areas and work in the agricultural sector (UNAIDS; 2006). Because of the epidemic, people who are infected become less productive (e.g. due to more absenteeism), which results in a lower income. HIV/AIDS increases the physical constraints of infected people, leading to more absenteeism. Especially in the agricultural sector, since this kind of work needs physical strength. A recent study of workers in Kenya s tea industry illustrated this. This study compared tea pluckers who eventually stopped working because of HIV-related causes with other workers, the study quantified sick days, casual leave days and those spent doing less strenuous tasks. The impact on workers wages was marked, as HIV workers earned around 17% less a year, than not-infected workers. (Fox et al.; 2004). This fall in income leads to a lower PV, which results in lower demand for education. This is represented in figure 3.2 by a lower slope of the line. Figure 3.2: The wage-schooling locus (source: Borjas; 2005; 243) e a r n i n g s Years of schooling 19

20 Lower life expectancy HIV/AIDS reduces the life expectancy for infected people. Figure 3.3 shows the change in life expectancy of the countries with a high prevalence rate. When people face a lower life expectancy, they have a shorter pay-off period, resulting in a lower PV and, again, a fall in demand for education. Figure 3.3: Changes in life expectancy in selected African countries with high HIV prevalence, 1980 to (source: UNAIDS Report on the Global AIDS Epidemic 2004) 3.6 The influence of HIV/AIDS on the discount rate The last determinant of the PV discussed in this chapter is the discount rate r. The higher the discount rate, the lower the PV and the less likely someone will invest in education. It is sometimes assumed that the person s discount rate equals the market interest rate. It turns out that the intersection of the marginal rate of return to schooling (MRR) 7 and the horizontal discount rate schedule determines the optimal level of schooling for this person (Borjas; 2005; ). Stated differently; stop schooling when the marginal rate of return to schooling = r In figure 3.4 the optimal level of schooling would be at S where the PV is maximized. 7 The MRR slopes downward because the wage-schooling locus is concave, as explained in the previous chapter. Furthermore we assume everyone has the same ability, and therefore the same MRR line. 20

21 Figure 3.4: The MRR schedule (source: Borjas; 2005; 244) Discount Rate r for infected people r for not-infected people mrr S* S Years of schooling Market interest rate Unless mentioned otherwise, it is assumed the discount rate equals the market interest rate. This paper assumes the market interest rate is higher for infected people, which makes borrowing more costly. First, they belong to a higher risk group, because the probability they will not be able to pay back the debt is higher. Second, their income is expected to be lower than the income of people without HIV, as discussed in the previous section. This makes it harder for them to borrow a reasonable amount of money. A rise in the market interest rate means a decrease in the years of schooling. This is also shown in figure 3.4, where the higher discount rate leads to a decrease from S to S* years of schooling. Time preferences So far it is assumed the discount rate equals the market rate, but this is a rather strong assumption. It is very hard to determine what the discount rate exactly implies. For example, instead of representing the interest rate, the discount rate could also depend on your time preferences. Casual observations suggest that people differ in their timing preferences. Some people are future oriented and some of us are not. Persons who are future oriented have a low discount rate and would be more likely to invest in schooling (Borjas;2005;242). People, who are infected with HIV/AIDS and need 24-hours a day private care, are very likely to have a more day to day life compared to people who are not-infected. Therefore they will have a higher discount rate, meaning he/she attaches less value to future earnings opportunities, resulting in a lower PV and in a lower demand for education. However, there is some evidence people with HIV/AIDS are future oriented, resulting in a low discount rate (Lammers et al.; 2006). Chapter 2 showed that HIV is a slowmoving disease, and under the assumption that a person lives around 10 years after infection (without treatment), infected people can make rational decisions about the amount of education that is profitable. In a research conducted 21

22 by De Lannoy in 2005 it came forward that education clearly has a very strong instrumental value in lifes of infected people. HIV mothers were convinced that the only way for their children to get a decent future, was to follow education. Therefore, they are not looking from a day to day perspective, they see education as a way out to a better future for their children. There is a need to achieve more, to give as much as possible. Education is important not only from an economic perspective (probability of getting a decent job), but also from a social perspective. They saw school as a place where children could forget about the demands that were placed on them at home, and they could build up a social life (De Lannoy; 2005). Hence, schooling increases the quality of life today and in the future. As a consequence, they attach more value to the future as they would without schooling. Because they value the future more, this results in a lower PV and an increase in the demand for education. 3.7 The Present Value for not-infected people The largest part of people in SSA countries consists of not-infected people. As already discussed in section 2.2, they may demand for more education, especially when the increased costs are not an impediment to invest in human capital. They realize the labour force will be smaller in the presence of HIV/AIDS, and because of a decrease in supply of workers these not-infected workers demand for higher wages. The fact that they will earn higher wages, results in a higher PV value and increasing their demand for education. The return of an additional year of schooling increases. However, not all not-infected people will demand for more education. Especially for the poor notinfected people the increased costs of education may be a too heavy burden, leading to a lower PV and less demand for education 3.8 Conclusion The model discussed in this chapter assumes the PV is determined by three variables, namely; direct and indirect costs (C), income earned (Y) and the discount rate (r). This section puts all the implications together in the model discussed in the last chapter. Figure 3.5 pictures the age-earning profile for infected people. Life expectancy is assumed to fall from 60 to 40 years. The direct and indirect costs of education increase because of HIV/AIDS. Also, lifetime income for infected people decreases, this is showed in the figure by a flatter line (Line A and B). 22

23 Ffigure 3.5: Age-earnings Profile for infected people Earnings A B costs Direct Costs Age The influence of HIV/AIDS on the discount rate is ambiguous. However, the economic model only takes economic consideration into account and therefore the discount rate is set equal to the market interest, which is assumed to be higher for infected people. The overall conclusion from the economic model is that HIV/AIDS has a negative influence on the PV of infected people, leading to a lower demand for education by infected people. However, as section 3.7 showed, not-infected people may demand for more education. This could imply that overall demand for education will increase, since the largest part of the population in SSA countries consists of not-infected people. On the other hand, not-infected people may also bear a burden. Especially in countries with a high prevalence rate, e.g. South Africa, it is assumable not-infected people are affected through the increase in the indirect costs of education. This results in a lower PV, and a fall in demand for education. 23

24 CHAPTER 4 THE IMPERFECTIONS OF THE MODEL What are the imperfections of the model? 4.1 Introduction This chapter describes the imperfections of the model discussed in the previous chapter. These imperfections explain, at least partially, why the PV principle is a too simple model and not able to predict what exactly happens with demand. The second part of this chapter takes a closer look on the situation of orphans as a specific group and their demand for education. 4.2 Imperfections of the model Economic model The economic model discussed in the preceding chapters is a purely economic model. As a consequence, it is a too simple model. It has certain assumptions that are not realistic and does not take into account several other aspects that people infected by HIV/AIDS consider as relevant. First of all, it assumes that people are rational and have full information about income flows and costs, which is not realistic. It is neither realistic to assume people are rational, it is possible that infected people are under a lot of stress and uncertainty about their future and the future of their surrounding they are not able to make rational decisions. Furthermore, the discount rate is set equal to the market interest rate, which is assumed to be constant. These are both strong assumptions. Intrinsic value of education The intrinsic value of people attach to education is not included into the model. As already explained in the second part of section 3.6, especially infected people may value education, because it is one of the few possibilities to a better living standard in the future, that is still left for them. Thus, although it may be very costly to follow education, they may see it as a primary good and spend a substantial part of their income on it. Savings behaviour The demand for education may also be influenced by the possibility to save and borrow money. These possibilities are not taken into account in the model. When infected people are able to borrow money they can use this to pay the direct costs of education and it may become more easily to follow education. However, as explained in section 3.8, infected people belong to a higher risk group and may face a high interest rate when paying back the debt. This is not totally correct; because for shortterm contract (e.g.; a 6 month loan) it does not really matter whether the person is HIV infected. There 24

25 is also the principle of asymmetric information, where people do no tell they are HIV positive and so get a loan. However in the case of long-term contracts people have to be honest about their HIV status. This can make it impossible for them to get access to credit. In the case of poor families it is often impossible they save money, because they have to use all earned income for today s consumption. Also, it is most of time very difficult for them to obtain a loan because of a lack of collateral, and the problem of assigning property rights in SSA countries (Economist; 2004). Section 3.5 described families will see their income fall because of HIV/AIDS. Especially poor families will suffer, because they do not have built up any savings. Therefore, HIV deepens the poverty among the already poor (Steinberg; 2002), which is likely to reduce their demand for education. Family situation It is impossible to create a complete model that shows how people make their decisions about education. This is because in SSA there are a lot of inequalities between people, and a lot depends on the family situation. For example, it differs whether you are born with HIV/AIDS in a poor family, or in a middle-income family. In the first case, the financial resources are limited and the amount that is available may have to be used for treatment cost. In the second case, besides the income spent on treatment costs, there is enough money left to invest in education. 4.3 Orphans and the PV principle For orphans the increased costs of education may be an obstacle to invest in human capital. Especially, when they do not get any financial support from other relatives or other people. Because of the increased costs, the PV principle would predict that orphans will drop out of school. This section discusses the situation of orphans in SSA, and whether they are more likely to drop out of school. In 2006 more than 12 million of these children live in SSA, where it is currently estimated that 9% of all children have lost at least one parent to AIDS (UNAIDS; 2006). By 2010, it is predicted that there will be around 15.7 million AIDS orphans in SSA (UNAIDS&UNICEF; 2004). Children orphaned by HIV/AIDS may miss out on school enrolment, have their schooling interrupted or perform poorly in school as a result of their situation. Direct costs present major barriers, since many orphans, or orphans caregivers cannot afford these costs (UNICEF; 2006). Another reason why orphans are less likely to attend school than non-orphans is, because it depends on the closeness of the ties between the orphan and the head of the household (Case et al.; 2004). It is clear that orphans are one of the most vulnerable children in SSA. For these children education is very important; because, as stated before, it is one of the most important ways they learn how to prevent getting infected. An analysis about schooling for children who lost both parents showed that double orphans (who have lost both parents) were substantially under-enrolled in Burkina Faso, Ivory 25

26 Coast and Kenya, but not in Tanzania, Uganda or Zimbabwe (World Bank; 2002). In another recent analysis (World Bank; 2002) of 23 countries, not only SSA countries, double orphans had a lower probability of getting enrolled, but not in all countries (figure 4.2). For example, in Nigeria (1999) and Uganda (1999/2000) the paternal orphans had a higher percentage of enrolment than children with both parents alive. A reason for this could be that they received more financial and social support from relatives or other people after becoming an (paternal) orphan. In Tanzania(1996), there was even a situation where double orphans had a higher enrolment rate than children with both parents alive. A reason for this could be the introduction of social programmes by governments or institutions, to improve the situation of orphans. Also, orphanages could play a role in the higher demand for education by orphans. Figure 4.2 enrolment rates by orphan status, age 7 to 14 years, selected countries and years. (World Bank; 2002) 26

27 Figure 4.3 School attendance among 10 to 14 years old (Monasch and Boerma; 2004) Monasch and Boerma found in 2004 that orphans are being about 13% (1-0.87) less likely (figure 4.3) to attend school than non-orphans (34 SSA countries). A study from Malawi found that double orphans were twice as likely to drop out of school (17.1% dropout rate) during the following year, compared with children with one parent dead (9.1%) or both parents living (9.5%) (Harris and Schubbert; 2001). In contrast, a study in northwestern Tanzania found that maternal orphans and children in households with an adult death delayed enrolment in primary school, but were not likely to drop out of primary school once enrolled (Ainsworth et al.; 2001). Most studies predict a decrease in school enrolment (less demand for education). However, what really happens is heavily depending on region and family circumstances (e.g. does an orphan get any support from other relatives after becoming an orphan). 4.4 Conclusion The PV is a too simple principle to predict what exactly happens with demand for education. It is a pure economic model, and does not take intrinsic values into account. Furthermore, it also depends on the family circumstances, and if families have any savings or are able to borrow money. Since the direct and indirect costs of education play an important role for orphans in their demand for education, the PV principle may be a reliable measure to see what happens with the demand for education. Especially, when they do not get any support, they are more likely to drop out. This is supported by most studies, but not by all. 27

28 CHAPTER 5 CONCLUSION What is the impact of HIV/AIDS on demand for education in Sub-Saharan Africa? This paper discusses the influence of HIV/AIDS on demand for education in SSA countries. Chapter 2 discussed a situation where demand for education is expected to fall, due to increasing costs of education, and a situation where demand is expected to increase, when the increasing costs are not an impediment to invest and people expect to earn higher wages. The figures in chapter 2 show there is an increase in demand for the different levels of education in most SSA countries. These figures show that demand for education is increasing in most countries, however, they do not say how the situation would be in the absence of HIV/AIDS. Therefore, it is impossible to say whether demand for education increases or falls. This chapter also discussed different kinds of infection. It is suggested the kind of infection would influence demand for the different kinds of education, because HIV/AIDS is a slowmoving disease. Secondary and tertiary education are expected to decrease more, however, the empirical evidence does not give an explanation for this hypothesis. Furthermore, the role of the fertility rate is studied. This is not done by using statistical tools, but by comparing the fertility rates of countries, which have nearly the same HIV prevalence rate. There may be a weak relationship, but the fertility rate is not the only variable that affects demand for education. A reason why demand for primary education may increase, is the introduction of supporting programmes by governments or institutions like UNICEF, which stimulate the demand for primary education. Chapter 3 develops a model that predicts what HIV/AIDS would do to demand. For this, the PV principle is used. With the help of the present value (PV) we can compare amounts spent and received in different time periods. Y-C PV = Σ if PV > 0 it is profitable to continue following education. (1+r) t The chapter studies the influence of HIV/AIDS on the main determinants of the PV principle; the costs, the lifetime income and the discount rate. The overall costs of education are increasing, and it is assumed this result in higher direct costs (e.g. tuition fees). Also the indirect costs (e.g. taking care for an ill relative) are expected to increase, resulting in a lower PV, and a fall in demand. The effect on income differs for infected people and not-infected people. Income for infected people is expected to fall, since they are less productive due to more absenteeism. Furthermore, they have a lower life expectancy and this results in a lower total lifetime income. Both lead to a lower PV, and 28

29 less demand for education. For not-infected people it may be different. Realizing the supply of workers will be less in the presence of HIV/AIDS, and assume the demand will be the same, they will demand for higher wages. This increases their return on an additional year of education, which increases their PV, raising their demand for education. Since the largest part of the SSA countries consists of not-infected, this could be a reason why demand for education would increase. However, as stated in chapter 2, not-infected people face higher direct cost as well. It is also possible they have higher indirect costs, because it may be the case they have to take care for an ill relative as well. This could reduce their demand for education. Hence, indirect costs depend a lot on the (family) circumstances. The influence of HIV on the discount is rather difficult to predict. When the discount rate is set equal to the market interest rate, it is assumed the discount rate is higher for infected people, because it is harder for them to borrow. A higher discount rate leads to a lower PV, and to lower demand. Nonetheless, there is some evidence infected people attach high value to education. They see education as a way to a better future, which makes them value the future more, resulting in a lower discount rate and to a higher demand. Chapter 4 discusses the imperfections of the model. First, The PV principle assumes people have complete information about future earnings, costs and their discount rate. Second, the intrinsic value is not taken into account. People may attach high value to education Third, the ability to save money and the family situation are variables that influence the demand for education, which are not taken into account. Furthermore, this chapter studies the situation of orphans and their demand for education. Direct and indirect costs are an important part of the PV principle and are also important for orphans in their demand for education. The PV principle would suggest that orphans would demand for less education because of the increasing costs of education. This is supported by most of the data, who predict a fall in education. A reason why the demand by orphans would not fall, is the set up of supporting programmes by governments and institutions. To conclude, the exact impact of HIV/AIDS on the demand for education is difficult to declare. It is not likely to have a positive influence on demand for education. Although data show that in most SSA countries demand will increase, this increase will probably be less than in the absence of HIV/AIDS. Education seems to be an effective way to increase people s knowledge about how to prevent getting infected. When people possess more knowledge, this is likely to reduce the magnitude of the epidemic. Therefore, the supporting programmes which stimulate demand are of big importance. 29