This paper presents empirical evidence on a specific mechanism through which demographic transition affects economic growth. The evidence provides support for the models of demographic transition emphasizing the demand for children. Using a panel of African countries during 1985-2000, I show that the AIDS epidemic effects the total fertility rates positively and the school enrollment rates negatively. These patterns are consistent with the theoretical models that argue the existence of a precautionary demand for children in the face of uncertainty about child survival. Parents, who are faced with a high mortality environment for young adults, choose to have more children and provide each of them with less education, leading a reversal in the fertility transition and a reduction in the aggregate amount of human capital investment. The empirical estimates show that a country that has witnessed the average increase in AIDS incidence for Africa, have 0.8 more births and 30 percentage points less primary school enrollment since 1985. The results imply lower economic growth and welfare for the current and future African generations.

We compare the estimated effects of health in a macroeconomic production function model of economic growth with the effects that are found using calibration based on wage regressions. We allow for gradual adjustment in income level towards the steady state which means that both the level and growth of inputs can affect economic growth. We find that the estimated macroeconomic effects of health are positive, and not significantly different from the microeconomic estimates. We find similar results for education provided we instrument schooling levels with literacy rates to correct for measurement error.

This study provides new evidence on the appropriate model of the economic and demographic transition. The episode analyzed is the eradication of hookworm disease in the American South (c. 1910). In previous work (Bleakley 2004), it was shown that the eradication of hookworm disease led to a significant increase in school attendance and literacy. The present study shows that this increase in human capital investment was accompanied by a fertility decrease that was both economically and statistically significant. A decline in the hookworm infection rate from 40 to 20% is associated with a decline in fertility that amounts to 40% of the entire fertility decline observed in the American South between 1910 and 1920. The relative change in fertility and schooling caused by hookworm eradication is approximately equal to aggregate comovements during the period considered. We argue that this evidence is consistent with models of the fertility transition emphasizing economic incentives rather than changing cultural attitudes and birth control technologies. Furthermore our data supports models emphasizing intergenerational altruism. Variables affecting childrens' economic prospects affect parental fertility decisions. A consequence of this finding is that we do not require changes in the economic opportunities faced by parents directly to explain the economic and demographic transition.

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