Reading through Cowen and Tabarrok's excellent textbook on Economics, I came across a fascinating claim. That the AIDS crisis in Africa leads to lower capital formation and lowers income levels up to three generations out. It might seem obvious, but the actual mechanism is eye-opening.
It starts with a question of why people save. To a large extent, this is driven by a desire to smoothen consumption over one's life time. So you save when you are earning, and consume more than your income after you retire. That way, your lifestyle remains more steady rather than going through massive swings. These savings are then channeled into the productive investments in the economy - factories, machines, infrastructure, etc. - which leads to growth and income rise.
With the AIDS epidemic, the life expectancy of people goes down. And therefore, apparently, does the desire to save. Since people don't expect to live too long, there is much less incentive to build savings to draw down in old age. The side effect is that overall capital formation in the economy is lower. Which in turns slows down growth and affects income levels, potentially for multiple generations.
So longer life-expectancy and earlier retirement age should lead to a greater savings rate?
AIDS, Africa, and growth
How lower life expectancy leads to lower economic growth
