The Economic Rationale The Economic Rationale for the for the ACT ACT Subsidy Subsidy

Kenneth J. ArrowKenneth J. Arrow

AmsterdamAmsterdam

18 January 200718 January 2007

I. The Economic ProblemI. The Economic ProblemA.A. Demand or UtilityDemand or Utility

1.1. Antimalarials in general: 1 million or more deaths/ year Antimalarials in general: 1 million or more deaths/ year Severe economic costs in adult lifeSevere economic costs in adult life

2.2. Artemisinins: Resistance to chloroquine and Artemisinins: Resistance to chloroquine and sulfadoxine-pyrimethamine (SP)sulfadoxine-pyrimethamine (SP)

B.B. ExternalitiesExternalities

1.1. ACTs: Slowing emergence of resistance to artemisinin ACTs: Slowing emergence of resistance to artemisinin compared with monotherapy: externality to the futurecompared with monotherapy: externality to the future

2.2. Cross-national spread of resistance: “global public good”Cross-national spread of resistance: “global public good”3.3. Local externality: high coverage reduces transmission Local externality: high coverage reduces transmission

(at least if latter is not too high)(at least if latter is not too high)

I.I. The Economic Problem The Economic Problem continuedcontinued

C.C. Supply: manufacturingSupply: manufacturing1.1. Cost of production: 20-fold increase (very roughly) Cost of production: 20-fold increase (very roughly)

over previous antimalarials.over previous antimalarials.2.2. Combination doesn’t add to costsCombination doesn’t add to costs3.3. Investment encouraged by predictable demandInvestment encouraged by predictable demand4.4. Predictable demand also encourages entry, Predictable demand also encourages entry,

competition, and incentives to innovate.competition, and incentives to innovate.

D.D. Supply: localSupply: local——The problem of distribution, an The problem of distribution, an essential pointessential point

1.1. Public, private, and NGO alternativesPublic, private, and NGO alternatives2.2. The chloroquine and SP experience: 70% of The chloroquine and SP experience: 70% of

distribution in Africa was done by private enterprise. distribution in Africa was done by private enterprise. Very wide distribution geographicallyVery wide distribution geographically

3.3. The importance of speedy treatment in malaria: The importance of speedy treatment in malaria: importance of availabilityimportance of availability

I.I. The Economic ProblemThe Economic Problemcontinuedcontinued

E.E. Ability to PayAbility to Pay Average annual incomes, $1,000 and less Average annual incomes, $1,000 and less Considerable inequalityConsiderable inequality

Example: Example: ~80% of the populations in Ethiopia, Zambia, and ~80% of the populations in Ethiopia, Zambia, and

Zimbabwe live on $2/day or less. Zimbabwe live on $2/day or less. Retail price for chloroquine or SP: $0.10/courseRetail price for chloroquine or SP: $0.10/courseFor artemisinins or ACTs, up $20/course. Even at For artemisinins or ACTs, up $20/course. Even at

the factory, the costs of ACTs are about the factory, the costs of ACTs are about $2/course.$2/course.

II. The Functions of SubsidiesII. The Functions of Subsidies

A.A. NeedNeed: Hardly requires discussion.: Hardly requires discussion.B.B. CriteriaCriteria: First, we want ACTs to be : First, we want ACTs to be

used as freely as chloroquine has used as freely as chloroquine has been; therefore the retail price of been; therefore the retail price of ACTs should be the same as the ACTs should be the same as the current price of chloroquine. current price of chloroquine. Second, we want to prevent Second, we want to prevent artemisinin monotherapy. That also artemisinin monotherapy. That also requires a low price. requires a low price.

III. III. The Location of SubsidiesThe Location of Subsidies

Local: Advantages and DisadvantagesLocal: Advantages and Disadvantages

AdvantageAdvantage: possible to target subsidy to the : possible to target subsidy to the needy; more just, cheaper. But really needy; more just, cheaper. But really impractical; administratively complex, impractical; administratively complex, most of population need aid. most of population need aid.

DisadvantageDisadvantage: Impossible to reconcile with : Impossible to reconcile with competitive private distribution. competitive private distribution.

III. III. The Location of Subsidies The Location of Subsidies continuedcontinued

B.B. GlobalGlobal

The chief alternative is a global purchasing The chief alternative is a global purchasing “agency.” It will buy ACTs of various kinds at a “agency.” It will buy ACTs of various kinds at a market price determined by competition among market price determined by competition among the producers. It will provide guaranteed the producers. It will provide guaranteed purchasing power for a market but not guarantee purchasing power for a market but not guarantee any one firm’s sales.any one firm’s sales.

Entrants with lower costs or different products (but Entrants with lower costs or different products (but always a combination of drugs) can be assured always a combination of drugs) can be assured of a place to compete.of a place to compete.

A centralized purchasing agency will have A centralized purchasing agency will have additional value in promoting quality control and additional value in promoting quality control and making registration easier. making registration easier.

III. III. The Location of Subsidies The Location of Subsidies continuedcontinued

B.B. Global Global (continued)(continued)

The agency will then be prepared to resell the ACTs The agency will then be prepared to resell the ACTs at a very low price, perhaps $.05 per dose (about at a very low price, perhaps $.05 per dose (about the present price of chloroquine at the port of the present price of chloroquine at the port of entry). Each country has, of course, the right to entry). Each country has, of course, the right to decide for itself on its distribution system. decide for itself on its distribution system. However, the global agency approach permits a However, the global agency approach permits a country to use private enterprise in its country to use private enterprise in its distribution, if it so decides on the basis of its distribution, if it so decides on the basis of its past experience.past experience.