HIV/AIDS, social security and the two-tier structure of African economies

This paper assesses the occurrence of HIV in Africa and its implications on both old-age support schemes and the two-tier economic structure in developing countries. It models a two-sector economy in a three-period overlapping generations framework where social security exists both formally as well as informally. In such a setup, the paper investigates how the occurrence of HIV/AIDS will affect migration between the two sectors, where both social security systems act as the motivation to migrate.

Starting from a scenario where there is no HIV/AIDS and only a small percentage of the population/labour force in the formal sector, the paper shows that a permanent decrease in the survival probability of children and adults, such as caused by HIV/AIDS, will lead to migration to the formal sector combined with increasing social security rates. The informal sector (and hence the informal social security system) will cease to exist, however, whilst this could be immediate, it is more likely that it will be a gradual process. In addition, it shows that a transitory shock to survival probabilities will increase the proportion of workers in the formal sector, after which it will remain constant.

The occurrence of HIV/AIDS could bring about two effects. On the one hand, migration to the formal sector could lead to a reduction in the population growth rate as those in the formal sector would have less need for more children due to the formal social security scheme. On the other hand, increases in child mortality could also lead to an increase in the reproduction rate as parents can no longer be sure how many of their offspring will survive and hence be able to support them in their old age.