Wednesday, March 10, 2021

Markets are not the solution to vaccine delivery in developing countries

Ajay Shah has an oped where he narrates the story of the deregulated pricing of demat securities settlement by private Depository Participants to make the case for deregulated sale of Covid 19 vaccines by private providers to expedite coverage. 

It's a great illustration of the limitations with application of logically neat and incentive compatible market solutions to complex public policy challenges.

He writes,

In the late 1990s, there was a clamour for price controls. Many proposed that the government or NSDL should control the price that DPs charge the customer. It was argued that if prices were not controlled, DPs would engage in price gouging or that DPs would not serve the poor. C B Bhave and others at NSDL argued that there was no market failure in the DP business. In a place like Mumbai, the cost of producing DP services was low, given the prices of skilled manpower, telecom connectivity, and reliable electricity. And, in Mumbai, there was a large volume of customers for DP services. As a consequence, the prices paid by customers in South Mumbai would be inevitably low. In remote places, it was costly to produce DP services, and there were fewer customers. The only way to achieve last-mile outreach was to have high prices. If there was a price control, DPs would choose to not serve remote places and DP services would be restricted to cities. In a remote place, if a DP charged a high price and earned a supernormal rate of return, this would attract others to start a competing business, as there was no entry barrier. The private sector would innovate and reduce costs. In the event, non-interference prevailed: The price charged by DPs was left to market prices. Competition developed, and the prices charged to customers crashed. Competition ate away the profit rate in the easy urban sites and DPs got the incentive to go forth into the great Indian hinterland, looking for more business. This generated outreach.

This is deceptive and an extremely misleading story. In fact it is shocking that this comparison could even be made. As I shall explain in brief, this extrapolation from the world of demat shares settlement to that of administration of vaccines is all logic with little understanding of the differences between the respective markets. 

Consider these points: 

1. In a country where the vast majority of population defer even the most urgent visits for medical care due to poverty/affordability, is it difficult to imagine the same vast majority ignoring/declining administration of vaccine on a disease which is by now tapering off? I am not even talking about behavioural biases that come in the way of vaccinations, an area with a large body of public health and economics research. 

2. In the context of the debate on health insurance in the US Supreme Court where its purchase was often compared with that of borccoli, this oped wrote that broccoli is a choice whereas health insurance is not. On the same lines, share market participation is a choice (in the Indian case, one would even say a choice available to less than 5% of the population) and Covid 19 vaccine is an essential health requirement.

3. On a related note, unlike share market participation, vaccines generate large positive externalities. In the case of Covid 19, with its extremely infectious nature, vaccines are an essential requirement (at least among certain population categories). Vaccination is required to protect the society (and country) as a whole from the disease. 

4. Then there is the issue of inequality. Markets allocate resources to those who can afford them. In case of scarce goods, even with some form of price ceilings, market allocation ends up overwhelmingly favouring those with the resources. For a massive country like India and also given the limited vaccine quantities becoming available, a primarily market driven allocation will invariably result in the vaccine administration being a trickle down exercise along the income ladder. And the trickle can be very slow beyond a certain income level. 

5. Unlike broccoli or demat shares settlement, vaccines involve adherence to certain protocols. They include post-vaccine follow-up in case of adverse reactions, second dose administration etc. In a country where private health clinics have to be (mostly unsuccessfully) forced into keeping and sharing patient data in case of periodic localised outbreaks of epidemics, adherence to such requirements in case of Covid 19 vaccine may be a stretch.

6. Effective markets are underpinned by strong state capacity. Weak state capacity engenders subverted markets. And India is a country littered with such subversions across markets. It is not at all difficult to imagine widespread protocols flouting, price gouging, and counterfeiting once the flood gates are opened to markets.

The article waxes eloquent about innovation of the private sector. As I blogged here, less said about it the better. More here, here, here, and here on India's private sector. We have drunk too much of the jugaad innovation Kool aid. Some idiosyncratic and localised anecdotes of jugaad do not make a story of constant industrial-scale innovation that improves the productivity of large economies. There is little of that to show for in the vast industrial and even software landscape of India. 

Some of other arguments are mind-boggling

Some private health care firms might find that it is better to import the Johnson & Johnson vaccine for use in remote places.
It's outright fanciful to imagine the likes of Pfizer and J&J to be supplying their vaccines anywhere in India, much less remote India, anytime in the foreseeable future (or any time at all) at prices which are beyond the reach of all but the richest 5 percent of Indians. This argument is purely self-serving - me and my likes should have access to vaccines!

As a counter-factual, consider this. India is the vaccine factory of the world. It has some of the cheapest vaccine prices in the world. The outreach of private medical care sector (formal and informal) is greater than that of the public facilities. Then why is it that private vaccines market is so tiny and largely confined to the upper quartile decile of the population? India did not eradicate communicable diseases on the back of any private sector innovation in delivery. In fact, private sector involvement in vaccine delivery was almost nil. 

None of this is to say private market should not be part of the vaccine drive. A low enough price should be fixed and vaccines administered privately too. But coverage of the vast majority of Indians in remote and rural areas will have to be through the public system, as has always been the case with all other vaccines. 

Some stories and narratives just endure, irrespective of the vast evidence to the contrary!

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