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Archive for the ‘Health’ Category

There was an interesting article in last week’s Economist about the use of prizes to promote innovation. It was supportive of the idea in general, but it seemed to gloss over the economic  arguments.  I think it is a shame that the Economist did not take the opportunity to explain the economics of rewarding innovation, and in particular to explain in economic terms why our current arrangements do not do a good job of creating incentives for innovation that benefits developing countries.

You can think of patents as a kind of prize.  When you invent a new product, the government gives you the right to operate a temporary monopoly. This enables you to charge more than the marginal cost, and the premium is your “prize”. This arrangement has the huge advantage that it links your reward to the amount people are willing to pay for your invention, so it encourages innovations that people actually value.

This kind of prize as a reward for innovation may be fine for a new kind of vacuum cleaner, or for Lady Gaga’s latest album. But it has two big disadvantages which are especially relevant for people who live in developing countries.

First, the use of patents prevents some people from benefiting from the new technology if they are unable to pay the higher price.  If a company develops a drug for heart disease, or a more efficient form of solar panel, the patent will enable them to charge much more than marginal cost for their product. That’s how the inventor gets paid. But the result is that millions of people will not be able to afford that product – though they might be able to afford it at marginal cost. The temporary monopoly results in fewer people benefiting from new technologies than ought to benefit, in the sense that those people would be willing and able to pay the marginal cost.  This is potentially a big welfare cost to society as a whole. It means, for example, that people may die of heart disease because they can’t afford the high price of the drugs, even though they could buy the drug if it were sold at marginal cost; or they can’t use new fertilizers or seed technologies, even though the benefits to them of doing so exceed the cost.

Second, if we reward inventors by granting them temporary monopolies, we only create incentives to develop products for which there are likely to be enough consumers wealthy enough to pay a monopoly price.   Nobody will invent a vaccine against malaria, or a cassava plant that resists mosaic virus, based on the possible rewards they will get from charging high prices to its consumers.  So the patent system is a prize for people who invent cures for baldness, but not a prize for people who invent ways to prevent the spread of malaria.

For these reasons, other incentives, such as prizes, Advance Market Commitments, and similar mechanisms, may be effective either as alternatives or complements to the patent prize of a temporary monopoly, especially for technologies that would have benefits in developing countries.

The Economist quotes Tachi Yamada, the president of Global Health at the Gates Foundation, as suggesting that Advance Market Commitments or prizes may not work well for drugs that require a long time to develop:

Tachi Yamada of the Gates Foundation is a big believer in giving incentive prizes, but gives warning that it can take 15 years or more to bring a new drug to market, and that even AMC’s carrot of $1.5 billion for new vaccines may not be a big enough incentive. No prize could match the $20 billion or so a new blockbuster drug can earn in its lifetime. So, in some cases, says Dr Yamada, “market success is the real prize.”

This seems to reflect the suggestion that is sometimes made that Advance Market Commitments may not be appropriate for for early stage drugs, but the economics of this argument is faulty.

It is clearly true that the reward for bringing to market an early stage medicine, such as an AIDS or malaria vaccine, would need to be higher, both because of the greater uncertainty and risk of failure, and because the rewards are further in the future.  So an AMC for an early stage product would probably need to be larger than for a late stage product that just needs some tweaking for use in developing countries and some investment in bigger production facilities.  But let’s not overstate this.  The median total market size for new chemical entities that pharmaceutical companies actually bring to market is about $3-$4 billion.  Most medicines are not $20 billion blockbusters.  So $3-$4 billion is roughly the market size that the private sector considers sufficient reward to develop new medicines.   We don’t need to match the blockbusters.  An AMC of $4 billion might well be enough to incentivize the development of a malaria vaccine: and let’s not forget that if it turns out not to be enough, it won’t have cost the funders anything.

Furthermore, just as the firms discount the prize by the risk of failure, the funders should similarly discount the cost.  If there is a 25% chance that no vaccine will be developed (because the technology is uncertain) then firms will discount the “prize” – that is, the value of the committed market – when they make their investment decisions.  But in this case, the expected cost to the funders of a $4 billion pledge is $3 billion, and this is what they should include in their value for money calculation.  That means that even though the nominal amount that has to be promised for an early stage product needs to be higher for a given impact on R&D, to take account of the probability of failure, the expected cost to funders is not higher.

The same point can be put another way.  A high probability of failure makes all investment in R&D less attractive, but it does not make AMCs relatively less attractive than other forms of funding.  When the probability of failure is high, the expected return from each dollar spent encouraging innovation is lower. This is true if that dollar is spent up-front in the form of research grants of the kinds normally given by aid agencies and foundations (since the higher probability of failure reduces the expected benefits of the grant), or in the form of a prize or promised market (since the higher probability of failure reduces the expected benefit to firms, and so reduces the incentive for them to invest in R&D).  The effect is the same either way. Higher probability of failure is clearly bad, but it does not make AMCs relatively less efficient as a way to pay for research for early stage products.

Whether an AMC for an early stage product is good value for money depends ultimately on the value of the product.  If donors were to spend $4 billion buying a malaria vaccine for use in developing countries, it would be a hugely good investment, saving millions of lives a year at a fraction of the price of many other interventions. It would result in huge savings on trying to prevent malaria in other ways, or treat to treat malaria; and the resulting reduction in the burden of malaria would have huge economic benefits for developing countries. Given that there is no question that donors would want to spend at least $4 billion paying for a malaria vaccine to be used across the developing world, it is inefficient for them not to say so right away, and thereby create incentives for private sector investment in accelerating its development.  The risk of poor value for money in aid spending comes not from making the commitment, but from failing to do so.

When Dr Yamada says that “market success is the real prize”, he seems to be missing the point that market success is not a good way of rewarding innovation for developing countries.   If we rely on market success, in the form of a temporary monopoly, to reward innovation then we will exclude half the world’s population from being able to access technologies developed with rich markets in mind, such as drugs against cancer and heart disease, clean energy, new agricultural technologies, or new software.  And “market success” creates no incentive to develop technologies which primarily benefit the world’s poor such as a vaccine against malaria or a variety of cassava that resists the mosaic virus, because inventors know that the people in poor countries cannot afford the monopoly prices that would enable inventors to recover their costs.

The Wall Street Journal reports that Bill Gates may now see that we need to invest in health systems, not simply fight individual diseases:

That question goes to the heart of one of the most controversial debates in global health: Is humanity better served by waging wars on individual diseases, like polio? Or is it better to pursue a broader set of health goals simultaneously—improving hygiene, expanding immunizations, providing clean drinking water—that don’t eliminate any one disease, but might improve the overall health of people in developing countries?

The new plan integrates both approaches. It’s an acknowledgment, bred by last summer’s outbreak, that disease-specific wars can succeed only if they also strengthen the overall health system in poor countries.

We already knew that, right? The big philanthropic foundations pride themselves on trying new approaches, and not being constrained by conventional thinking. Great. But it is a pity when they have to reinvent the wheel themselves.

A new article published in The Lancet by Chunling Lu with Chris Murray, Dean Jamison and others, has caused quite a stir in development circles.  They use data on health aid and government spending on health to estimate that for every $1 given in health aid, the recipient government shifts between 43 cents and $1.14 of their own spending to other priorities. (If the aid goes to NGOs, by contrast, government health spending appears to increase.)

Even if the quantitative analysis is correct (which is by no means certain, given huge gaps in information), it is far from clear that this is a problem that needs to be solved. Furthermore, of the five recommendations in the paper, three are irresponsible sectoral special pleading which deserve to be rapidly dismissed.

This story has spilled over into the mainstream press (for example, in The New York Times) as a result of a sensationalist AP story headed “Health Aid Made Some Countries Cut Budgets“. The story breathlessly reveals:

After getting millions of dollars to fight AIDS, some African countries responded by slashing their health budgets, new research says. For years, the international community has forked over billions in health aid, believing the donations supplemented health budgets in poor countries. It now turns out development money prompted some governments to spend on entirely different things.  … “When an aid official thinks he is helping a low-income African patient avoid charges at a health clinic, in reality, he is paying for a shopping trip to Paris for a government minister and his wife,” said Philip Stevens, of the London-based think tank International Policy Network.

The language used by the authors is less inflammatory, but the opening sentence makes it clear they think there is a problem:

Government spending on health from domestic sources is an important indicator of a government’s commitment to the health of its people, and is essential for the sustainability of health programmes.

As summarized in their press release, the authors make five recommendations to deal with this alleged problem:

• adoption of a clear set of reporting standards for government health spending as source and spending in other health-related sectors
• establishment of collaborative targets to maintain or increase the share of government expenditures going to health
• investment in developing countries’ capacity to effectively receive and spend health aid
• careful assessment of the risks and benefits of expanded health aid to non-governmental sectors
• study of the use of global price subsidies or product transfers as mechanisms for health aid

The first recommendation is fine: I’m all for the adoption of reporting standards for spending by donors and by governments, and for those standards to specify the source as well as the destination of all spending. (The authors may not be aware of the progress that is being made globally on this under the International Aid Transparency Initiative).   It is also hard to be against investing in the capacity of developing countries to receive and spend health aid, though I wonder what this means in practice.  The other three recommendations are irresponsible, for reasons we shall come to below.

Let’s start with the problem we are trying to solve.  It is far from clear that the behaviour of developing countries described in the paper is anything we should be concerned about.  Of course health advocates who earn their living from health spending in developing countries are up in arms at the news that their various wheezes to capture a big chunk of available development finance and redirect it to their cause may not have been a complete success.   But those of us who take a more objective view of the relative priorities of different types of development spending can be more sanguine.

There are at least four reasons why the findings of the paper should not be a cause for concern.

First, it suggests that governments are reprioritising their spending in the light of the aid they are receiving. I think this is a good thing.    Exercises to find out what poor people actually care about, such as Voices of the Poor, routinely find that the poor place put a lot of value on security (of person and property), but this does not usually excite people who work in development.  Donors find it more attractive to finance health services than to pay for essential services such as a national statistical office or the efficient functioning of courts.  If we are willing to pick up the bill for health care then it is not only reasonable but desirable that developing countries should use the fiscal space we have created to invest more in important national priorities that don’t happen to be of interest to their donors.

Second, increases in aid for health may well come at the expense of other forms of aid which developing countries are right to try to offset.  (I say “may well” because of course we don’t know what would have happened to total aid if health aid had not increased so rapidly.)  Donor fads come and go: this year it is agriculture.  When developing countries see health aid rising, but the donors losing interest in infrastructure, the most sensible thing they can do is make an offsetting shift in their own budget allocations.  When the donor pendulum swings back again, recipient countries will have to make the corresponding shift in the opposite direction.

Third, as eloquently pointed out by Sridhar and Woods in the Lancet, the desire to force changes in the spending priorities of recipient countries runs directly contrary to the evidence about what makes aid effective, and a series of international agreements, especially the Paris Declaration (2005) and Accra Agenda for Action (2008). In the face of evidence that aid is most effective when there is ownership by the recipient country, donors and multilateral agencies committed themselves to align their aid with the systems and priorities of recipient countries.  It is not OK for health sector lobbyists to ignore this because they don’t like the priorities actually chosen by developing countries.

Fourth and finally, we say that we want to see capable, accountable and responsive states in developing countries.  Making, passing and executing budgets is the very heart of a capable and accountable state. That is why in the UK, as in many other western-style democracies, a government which cannot pass its budget (“carry supply”) is deemed to be unable to govern.  If resource allocation priorities are determined elsewhere, then the government is one in name only.  We cannot expect governments to be accountable to their citizens for decisions that they have not made.  If we want accountable states rather than puppet client states, we should rejoice, not complain, when they demonstrate a willingness to make choices of their own.

Sectoral advocates may say that we should not accept the priorities determined by developing countries, especially in countries in which there are weaknesses in democratic accountability or technical ability to execute budgets.   They might say that the government represents the interests of an elite, not the majority of the country’s poor.  Of course that may be true in some countries: but there is no reason to think that donors’ priorities, also driven by vocal lobby groups and vested interests, reflect the real needs of a country or its poorest people.  We should avoid getting into the situation in which well-heeled foreign academics and lobbyists from international NGOs with no accountability to people in developing countries are treated as a more representative voice of the poor than their own government.

What is most shocking about this paper is that it betrays a combination of ignorance of, or indifference to, decades of experience about what works in development.  The three most egregiously inappropriate recommendations amount to setting input targets, bypassing government by using NGOs, and giving aid in kind rather than in cash.  The paper’s authors should pause to reflect on the fact that progressive development thinking has fought a long, slow, painful campaign to shift away from exactly this kind of aid, and for very good reasons.  Aid that leads to long-term, sustainable change must be based on real ownership of the developing country and help build rather than undermine or marginalise national institutions.

To be fair to the authors, the press release is quite measured, and it begins by highlighting the commitment to health by developing country governments.  It also highlights the most important and sensible of their recommendations, the need for greater transparency.   But the paper also irresponsibly creates the impression, amplified by the Associated Press, that health aid has somehow been wasted, and that donors should try to address this in ways that would be a couple of steps backwards on the long slow road to more effective aid.

Laura Freschi at AidWatch lists four ways in which the brain drain from Africa is a good thing. Her analysis includes (a) gains to the migrants; (b) gains to the migrants’ families; (c)the benefits of exchange of ideas; and (d) the stimulation of the accumulation of skills.

This is consistent with what Michael Clemens at CGD has been saying for a while. (Take a look at his very accessible and interesting article in Foreign Policy, for example).

Yet it remains the received wisdom that industrialised countries should do more to prevent workers from moving from developing countries to rich countries.  There is an unappealing alliance between the development activists and the unions to limit the use of medical professionals in the British National Health Service.

It is becoming increasingly clear that preventing people from developing countries from accessing the labour market in developed country impoverishes poor nations in a the same way as preventing access to our markets for goods and services.  Yet this is a campaign that development advocates are strangely reluctant to take on.

I like GAVI (the Global Alliance for Vaccines and Immunization) a lot. Childhood immunization is a hugely cost-effective way to help people in developing countries, and GAVI does very good work helping to get vaccines to children in developing countries.

And it is because I like GAVI that I was alarmed to read this recent statement of their business model:

GAVI’s business model is based on the expectation that rising demand for immunisation in developing countries induces more companies to produce vaccines, thus creating competition and driving prices down.

Why this is not their business model

Read that sentence again and you will see that it makes no sense.  If prices are going to fall, why would more companies enter the market and create the competition that forces prices down?  (Perhaps they don’t read GAVI’s website and so they don’t know what is in store for them?)

Let’s go back to the supply and demand curves of undergraduate economics (see diagram).  If you move the demand curve out (“rising demand for immunisation”) then quantities and prices will both increase.

The very best you could hope for is that supply of vaccines is very elastic (it isn’t, sadly); in that case the supply curve (the blue line) would be quite flat and the rise in price would not very large when demand increases.

But supply curves are not flat (at least, not in the short run) and they certainly do not slope downwards, so prices ain’t gonna fall when demand goes up.

I defy GAVI to produce an analytical model that underpins their “business model” as they describe it above.

So what should GAVI’s business model be?

There are two ways that GAVI can bring down the price of vaccines: one bad, one good.

GAVI can work with UNICEF to drive down the price of vaccines by using the market power of a monopoly buyer (a “monopsonist”).   When vaccine manufacturers make a sale, there is something in it for the seller (profit) and something in it for the buyer (the vaccine is worth more to them than they pay for it).   The division of these benefits (the “surplus”) depends on the bargaining power of the parties.  If GAVI and UNICEF can use monopsony powers, they can extract more of the surplus, by driving down the price and hence the profits of the vaccine manufacturer.

In the world of development advocacy, pharmaceutical companies are pantomime villains, making outrageous profits at the expense of the poor.  So reducing their profits and holding down prices must be good, right?

Well yes, if you don’t want pharmaceutical companies to invest in research and development for future medicines for developing countries, if you don’t want them to invest in manufacturing facilities big enough to produce in large volumes for these markets, and you don’t want them to spend time and money getting their products regulatory approval in those countries, then driving down their profits is exactly what we should be trying to do.  Of course, Big Pharma can look after itself, and that is what it does. When we take away their profits in developing countries then they will go and make profits somewhere else.  Dastardly villains.

Driving down the commercial viability of medicines in developing countries may not be our best plan. It may feel good in the short term sticking it to Big Pharma, but that is not necessarily good public policy. The anti-pharma campaigners should be glad they won’t be the ones who have to  explain to a woman comforting her child dying of malaria why there is no vaccine for this disease.

This isn’t a theoretical risk: it is what has actually happened to the vaccine industry over the last 40 years.

Although this is not a great strategy, is is the approach being pursued by some global foundations such as the Clinton Foundation.  The UNICEF procurement division has similarly long had the objective of driving down prices, without regard to the long-run viability of the businesses developing and supplying pharmaceuticals to the developing world.

But GAVI can do something which benefits both developing countries and the pharmaceutical industry, increasing quantities and reducing prices.  It can help to reduce the cost and the risk of producing vaccines for developing countries. By pushing down these costs, the result can be higher volumes and lower prices, in a way that does not simply transfer the surplus from producers to consumers.

One way that GAVI can (genuinely) reduce costs without damaging the industry is by entering into long term contracts for vaccine purchases.  Both the International Finance Facility for Immunization and the Advance Market Commitment are excellent examples of this approach [UPDATE: in the light of David Roodman's comment below, let me clarify that GAVI is already doing this, which is excellent.  My view is that they should do more of it.]  Long-term commitments enable manufacturers significantly to increase production volumes and reduce unit costs (because the large fixed costs are spread over more units).

It is the ability to make commitments, not the increase in demand, that is important here.  Long term commitments are important because without them, vaccine manufacturers are vulnerable to “hold up“, a problem familiar in the economics literature on industrial organisation and utility regulation.  Manufacturers face the risk that, once they have invested in developing a new vaccine, getting regulatory approval, and spending hundreds of millions of dollars putting in place large-scale manufacturing capacity, the donors will then gang together to use monopsony purchasing power to drive down the price to around the marginal cost, ignoring the sunk costs of developing and producing the vaccine. At marginal cost pricing, the manufacturer never recovers the cost of their investments.  After the vaccine has been manufactured, this is a rational thing for donors to do, since it reduces the price to a level at which the largest number of vaccines can be purchased.  But before the vaccine is manufactured, the vaccine companies anticipate the likely future behaviour of donors, given the donors’ incentives; and this undermines the investment case for developing and producing vaccines for the developing world.   Donors can avoid this by entering into a long-term commitment which prevents them from driving down the price later on.

GAVI can also use its expertise and connections with government to streamline and simplify regulatory processes, which are a big cost driver.

Costs will fall, and demand will rise, as a result of this approach.  But this is the opposite way round from GAVI’s current (economically illiterate) business model: under this approach the rise in demand is a consequence of the fall in prices, not the cause of it.

So GAVI can have most impact by doing the opposite of what many people think it should do (and the opposite of what some other global funds try to do).  Rather than using its market position to drive down prices, damaging the long-run viability of the vaccine industry, it should use its position to enter into long-term contracts which enable manufacturers to produce at high volumes and low unit costs.

This means that rather than trying to drive down prices by increasing competition, GAVI’s business model should be to lower prices and so increase the amount of vaccines bought and used, while promoting the long-run health of the vaccine industry, by helping to reduce costs and risks for producers.

Aid budgets are limited by the amounts that rich countries are willing to allocate for foreign assistance.  There are limits to the generosity of parliaments, finance ministries and taxpayers.  At the same time, in developing countries there is not enough money to pay for everyone’s basic needs for food, water, shelter, health and education.

Because the total resources available are less than the needs, it is very important how they are used.  If poor decisions are made about the allocation of precious aid resources, the result can be additional suffering and death for millions of people.

This post why I think that attempts from outside to argue for aid to be earmarked for particular causes can lead to unnecessary deaths and suffering.  Aid works, but it could work better, and many sectoral advocates are not helping.

***

A striking example is the amount of money donors earmark for spending on HIV and AIDS here in Ethiopia.

Government spending on health in Ethiopia comes to about $4 per person per year.  According to OECD/DAC data, foreign aid for health in 2007 added about $5.15 per person to the government’s resources, bringing the total of government and aid resources to about $9 – $10 per person per year. (As an aside: health spending per person per year in the UK is about $2,000 per person per year; in the US it is about $4,500.)

According to the World Health Organisation (WHO), in Ethiopia about 65% of the population (52 million people) live in areas at risk of malaria. Malaria is the leading cause of health problems, responsible for about 27% of deaths; and malaria epidemics are increasing. The HIV/AIDS prevalence rate among adults is 2.1% (2007) – that’s about 1.6 million people living with HIV.

Of $5.15 per head provided in aid for health to Ethiopia in 2007, about $3.18 per head was earmarked for HIV  while about $0.26 cents per head was allocated to malaria control.  Given the relatively low burden of HIV, earmarking 60% of health aid for HIV is excessive relative to other needs for health spending.

Of course it is right that we should try to make sure that everybody with HIV has access to medicines to keep them healthy, and we should work to prevent spread of the disease. But we should also make sure that people have bednets and drugs to stop malaria, provide childhood vaccination to prevent easily preventable diseases, ensure access to contraception and safe abortions, and, above all, enough funding to provide basic health services that would save thousands of lives and suffering.  Yet we are not willing to provide enough money to do all of this.  It is in this context that it is damaging to earmark 60% of health aid to HIV.

This excessive funding of HIV relative to other health needs is damaging in at least three ways.

First, aid money is not being spent in ways which would yield biggest impact. Take this analysis from the Open Budgets Blog:

Using these estimates, it would cost an additional US$29.7 million to treat all of the 540,000 kids who died from pneumonia/diarrhea in Nigeria and Ethiopia. Were this money to come out of the HIV budget, it would reduce the number of HIV patients that could be provided treatment by about 61,240. So, using these admittedly very rough estimates, our current allocation of resources from the pot of money for disease treatment suggests that we value the life of a person with HIV at 8.8 times the value of the life of a child with pneumonia.

Another way of looking at this is that reallocating resources from HIV to treating pneumonia and diarrhea in Ethiopia and Nigeria alone would have saved nearly half a million additional lives in one year.

Second, the misallocation of aid money sucks scarce resources (administrators, doctors, political attention) from other programmes which would have more impact. As Rakesh notes:

In Tanzania, I have seen any number of health centers which lack water and toilets, where women cannot deliver their babies safely, but which has a new building with 4 air conditioners and 2 Land Cruisers and weekly workshops on AIDS.

I wrote about this problem in 2007 after visiting a clinic in Burkina Faso which had been starved of medical workers by the recruitment drive by the local PEPFAR-funded clinic. And Laurie Garrett wrote in Foreign Affairs about the impact on basic health facilities of funding linked to specific diseases.

Third, the misallocation of aid money creates perverse, possibly lethal, incentives.  Here in Ethiopia the existence of huge amounts of aid money for AIDS chasing too few people with HIV means that there is a kind of welfare state emerging for people with HIV.  It is not perhaps the welfare state we see in many European countries, but it is much better resourced than is available for people without HIV.  As well as free health care, people living with HIV are supported to find work, and their children get free education.  NGOs fall over themselves to get people living with HIV and their families onto their lists.

The result is that some Ethiopians emerge from being told the results of their voluntary HIV tests in tears because they don’t have the disease and so do not qualify for this assistance. The quality of life for them and their families would be better if they did; and their life expectancy could well be higher, given the access to health services that would be unlocked.  There are even rumours here in Addis Ababa that some people are deliberately getting themselves infected, so that they can give their children a better start in life.

***

I have used the example of HIV because the misallocation is particularly egregious here in Ethiopia (as it is in some other countries in sub-Saharan Africa). But I do not want this to be misunderstood as an attack on AIDS activists, or on funding for HIV in particular.  Some of my best friends – indeed, some members of my family – are AIDS advocates and they are among the most committed and well intentioned development advocates.  If they had been listened to earlier, a great deal of suffering in sub-Saharan Africa and elsewhere could have been avoided; and the path to development would not have been so long and arduous for the countries most affected by AIDS.  These advocates are merely one group among many making the case (and earmarking funds) for their cause.

Look, for example, at this recent paper by ODI on education (funded by the Hewlett Foundation) which complains that while funding for basic education has grown in real terms it has not grown as a share of total aid. The paper is all about how education advocates can do more to “capture” the global stage and compete with health spending. (“Capture” is their word, not mine).  And I am not picking on education either.  There are endless demands from activists to commit more money to agriculture, microfinance, water, maternal mortality and a long list of other important issues.

The development industry seems to be riddled with people whose main job is to divert money  to their good cause.   The advocates are united by a strong belief in the priority that should be given to their sector (education, water, AIDS etc). They convince themselves that they are speaking for real interests of the poor, which they consider to be unaccountably neglected by everyone else. Within many aid agencies there is a permanent state of low intensity bureaucratic warfare for resources, sucking up the time and attention of staff as they fight to defend and expand funding for the causes they work on.  They deliberately stoke up pressure in private alliances with civil society organisations – many of whom they fund – to raise the political stakes through conferences, international declarations, and publications with the aim of committing funders to spend a larger share of aid resources on their issue.  Territory is captured and held by way of international commitments in summit communiques.  But for the aid budget as a whole these are zero sum games, and everyone would be better off – and many lives would be saved – if it stopped.

The advocates might defend themselves by saying that they are trying to bring more money into development, not to reallocate aid from one cause to another.  But as they know, or ought to know, that is not how development budgets work.  The UK commitment to spend $15 billion on education by 2015 does not advance by one day the path to UK aid reaching 0.7% of GDP.  Either the commitment is meaningless, because that much money would have been spent on education anyway; or it has resulted in a reallocation of aid within a fixed total to education from something else which would otherwise have been a higher priority.

The earmarking of funds within a fixed total takes money from one good cause and puts it into another. If the money moves to a lower priority, the result is additional suffering, more deaths, a longer journey to economic development, and the need to give more aid, for longer, than if choices were driven by locally-determined, well-informed, evidence-based decisions about needs and priorities.

Here in Ethiopia, the Minister for Health is very clear sighted and articulate about the health priorities for his country, and the need to allocate resources to building effective basic health systems.  Within the limited resources it is able to control, the Ethiopian health ministry makes intelligent decisions about priorities, understanding the variations within the country as well as between countries.  They have much more detailed and specific understanding of the issues that affect people here than well-meaning activists in Europe or America.  Furthermore, it is their country and their path to development, not ours.

***

What do we need to do differently? I set out in a recent  CGD Working Paper the need to address the political economy of aid.

First, we should be much more rigorous and systematic about defining and measuring results from aid so that well-informed choices can be made.  There is a huge and expensive industry of “monitoring and evaluation”, most of the results of which is worth less than a pitcher of spit. We should dismantle it, and use a fraction of the money to fund a smaller, more sharply focused, more rigorous, international, independent collection of real evidence about the cost effectiveness of development interventions.  (Tentative steps in this direction are, of course, being fiercely resisted by the trade union of evaluators.)

Second, we should try to stop earmarking aid; we should make more use of results to demonstrate that aid is effective. The Paris and Accra agendas for aid effectiveness, which have been agreed by all the donor nations, require donors to respect the development priorities of aid recipients.  But there has been almost no change on the ground in this direction.  One step towards doing this is to put in place simple but rigorous ways to measure and attribute results, so that donors can be confident about  (and can explain to taxpayers) how their aid has been used.  If we cannot produce compelling evidence about what aid has achieved, it should be no surprise that ministers and taxpayers want to determine in advance how the money will be spent.

Third, we should stop creating global funds, and merge or close the ones we have got.  The existence of bureaucracies whose raison d’etre is to spend money in a particular sector or in a particular way creates incentives to promote resource misallocation because it protects jobs and institutional budgets.

Fourth, we must massively increase the transparency of past, present and future aid, so that informed decisions can be taken about how resources are allocated (not just between countries and sectors but within them).  Under current arrangements, donors publish details of their aid up to 23 months after it has been spent. Donors need to publish detailed information about their current and planned future activities so that governments, donors and the private sector can identify the gaps where additional resources would have most effect.

Fifth, we should, as a development community, heap scorn and opprobrium on anyone caught advocating for more resources in their sector.  We need stronger social norms in development that frown upon this kind of anti-social behaviour.

***

You may think that this is all a bit over the top.  Arguments about the architecture of aid may sound rather abstract and rarified, but aid is a scarce, precious resource and it is no exaggeration to say that if we spend it badly, the result is the avoidable deaths of literally millions of people.

On the first World Pneumonia Day, spare a thought for the mothers and fathers of the five thousand children who will be killed today by pneumonia.

Pause for a moment in silent thanks to the staff of the GAVI Alliance which works to get immunisation to children in developing countries.

If you pay taxes in Italy, the UK, Canada, Norway, or Russia, pat yourself on the back.  Your government has contributed to a market-based financing mechanism called the Advance Market Commitment, or AMC.  This provides  an incentive for vaccine makers to produce suitable vaccines in the necessary quantities at an affordable price for developing countries. The result is that GAVI has been able to reduce the current price of existing pneumococcal vaccines by up to 90%.

In the past, it often took 15 or 20 years before vaccines developed for rich countries were sold at affordable prices in developing countries.  Because of the Advance Market Commitment, four vaccine suppliers are now offering pneumo vaccines, specifically developed for the the developing world at affordable prices.

This is aid at its best: creating financial incentives for companies to bring their expertise and innovation to the table to solve some of the world’s most pressing problems.  Donors only pay for vaccines that actually get delivered and used. This money will save the lives of about seven million children over the next 20 years.

We owe a debt to Michael Kremer and Rachel Glennerster for the idea, to the Center for Global Development (especially Ruth Levine) for developing a practical proposal, to Carlos Monticelli from the Italian Finance Ministry who steered a group of donors to make it happen, to the Bill and Melinda Gates Foundation for paying for background research, to Orin Levine, Gargee Ghosh, Amy Batson, John Hurvitz, Andrew Jones, Susan McAdams, and many others for making it happen.

And to the countless bureaucrats and nay-sayers who thought it could never happen: yah-booh-sucks.

Over on Huffington Post, Seth Berkley and Orin Levine make a plea for the United States to consider an Advance Market Commitment for an AIDS vaccine:

Traditionally it has taken up to 20 years for new vaccines to reach children in developing countries. The AMC can fix this inequity. Through the pneumococcal AMC, and with the support of the GAVI Alliance which administers it, children in Rwanda and the Gambia are benefiting from pneumococcal vaccines even before children in wealthy countries such as Austria and Japan. What’s more, the mechanism is spurring development and deployment of two newer vaccines that extend protection against strains of pneumococcal disease most common in the developing world. Thanks to such advances, the accelerated use of pneumococcal vaccination is projected to save 5 to 7 million lives by 2030.

The idea (which is mainly down to Michael Kremer at Harvard) is simple: donors promise in advance that if somebody invents and delivers a vaccine that meets certain requirements, then donors will  pay for it to be bought in large quantities.  That promise may provide sufficient certainty for the private sector to invest in developing new products, and to build large-scale manufacturing facilities.  Take a look at this video to see what a difference Michael’s idea is already making.

From a public policy point of view, a nice feature of this schemes is that if it doesn’t work, it doesn’t cost anything.  If you make a promise to purchase an AIDS vaccine when one is developed, but scientists are unable to crack the puzzle, then you have not spent a dime.  You are only committed to buying an AIDS vaccine when it is developed – which, let’s face it, you would have done anyway. By making a firm commitment in advance, you change the incentives for the private sector.  (The economics is set out here in an article in The Economists’ Voice.)

This scheme is designed to tackle an economic problem that runs deep in most market  economies. We typically set up incentives for firms to innovate by promising them a temporary monopoly (through patents) if they are successful. This enables a firm to charge a premium for a limited period to recoup its investment and to compensate it for the risk it has taken.  But this scheme only works if the consumers are willing and able to pay that premium.  (And even then, it has a social and economic cost because it excludes consumers too poor to pay the premium).  The scheme doesn’t work at all for products most of whose consumers are very poor – such as people who get malaria or who need cassava plants that are resistant to attack by the mosaic virus.  That’s why firms spend ten times as much hunting for a cure for baldness as they do hunting for a cure for malaria.  The Advance Market Commitment makes investment in those products much more attractive to the private sector, because now there is an opportunity to charge a premium (paid by the donors) even though the ultimate consumers are poor.

We will be in a better position to judge the effectiveness of the pneumococcal AMC when kids are actually getting injections paid for under the AMC. An important test will be whether we see pharmaceutical firms returning to the development and large-scale production of vaccines for developing countries (and there are some early signs that this is happening).

But the Pneumococcal AMC has already taught us that it is possible to navigate the legal, financial, commercial and political waters to put in place a legally-binding multi-donor commitment to buy a future product. This is the result of outstanding work done by the Center for Global Development (in which I am proud to have played a small, walk-on part).  Early nay-sayers complained that an AMC was theoretically attractive but impossible in practice.  CGD played a critical role by developing a practical way of implementing the idea, which opened the door to the implementation of the pneumo AMC.

Now that it has been shown that an AMC is technically possible, we should be looking at:

• designing an AMC for an “early stage” vaccine such as AIDS;
  It is occasionally said that an AMC works for a late stage product – ie one that has already been largely developed but needs incentives to get it produced – but that it would not be appropriate for products still requiring substantial research and development.  There is no logic to this argument. The original modelling for an AMC was done for an early stage vaccine, and I have never seen a cogent case against using the approach (alongside conventional government funding for basic research) for products at an early stage of development.
• how to get the United States involved
  This approach – of providing incentives for private sector entrepreneurship and risk taking  to be involved in products for developing countries – ought to appeal to US policy-makers, and I have never understood why the US stood aside from the first AMC. There are some technicalities involved making commitments in the US budget process but these are not insurmountable.  Let’s hope the US will be part of the next AMCs.
• using the AMC approach for other health products
  In principle, the AMC could be used to encourage the development and manufacture of a range of other health products such as drugs, diagnostics and surgical instruments
• using the AMC to promote other forms of other research and development
  we should consider whether the AMC might be a good approach for donor funding of other forms of research and development for products mainly used in the developing world, such as new agricultural varieties, solar energy products, and ways of providing clean water.
• the possibilities for other forms of “pull” incentive for research and development
  The AMC is not the only possible pull mechanism to incentivise research for products needed in developing countries. For example, donors might set up schemes to buy out patents, prizes or other rewards for success (e.g. payments linked to DALY’s averted or social rates of return). We should look again at the costs and benefits of these different ways of getting the private sector involved.

Tim Harford has an interesting article in this weekend’s Financial Times about private health and education in developing countries:

Imagine that your daily earnings were less than the price of this newspaper. Would you consider buying private education and private healthcare?

Before you make up your mind, here are a few considerations: government healthcare and primary education are free; the private-sector doctors are ignorant quacks and the teachers are poorly qualified; the private schools are cramped and often illegal. It doesn’t sound like a tough decision. Yet millions of very poor people around the world are taking the private-sector option. And, when you look a little closer at the choice, it’s not so hard to see why.

Now there is a dilemma here.

On the one hand, we know that charging even a very small amount massively reduces the take-up and impact of services such as health and education. (This survey by Holla and Kremer summarises the evidence.)  So charges excludes many people from access, and it seems likely that the poorest and most vulnerable will be excluded most of all.

On the other hand, we know that public services in developing countries are often poorly managed and badly delivered. That’s why, as Tim points out in his FT article, many of the very poorest people choose to go private instead.

Apologies if this is anecdotal, but I see this dilemma in practice every day. My partner works for Marie Stopes International, which operates 21 clinics for women (providing contraception and abortion) here in Ethiopia.  They charge their clients for services – a small amount which is just enough to pay for the cost of running the clinics.   The result is that they are very focused on delivering services that will bring their clients into the clinics every day – that is, services that they actually need, at a price they can afford.  My feeling is that, as a result, they are more focused on their customers than most public services in developing countries, and indeed in some developed countries, whether financed by aid or by taxation.

So how can we disentagle ourselves from the horns of this dilemma?  Here are three thoughts:

• First, we should take seriously Tim’s observation that “a little accountability goes a long way” and think  much harder about how we can make public services more acountable.  You have probably heard about the way more funding reached Ugandan schools as a result of greater transparency (though the details have been disputed (pdf)). The work of my team on aid transparency is a modest contribution to this effort.
   
• Second, we should not be ideological about whether the public or private sector actually provides services, as long as the government takes steps to ensure that there is universal access. For example, governments (with the support of donors) might issue vouchers to the poorest, enabling them to choose for themselves whether to use public or private services.
   
• Third, in the long run this problem will be reduced if and when there is equitably shared economic growth which gives people sufficient incomes for these kinds of choices to be more reasonable.

Edinburgh University forces firms to supply cheap medicines to developing world:

Edinburgh is to become the first British university to help make cheap medicines available to the developing world by licensing research to pharmaceutical companies only on condition that poorer communities get life-saving drugs at cost price.

That’s great. Differential pricing is good for everyone. (Here’s why).

On his first day in office in 2001, President George W. Bush  reinstated the so-called Mexico City Policy — known to critics as the global gag rule. It prevents the US government from giving money to organizations that provide counseling and referral for abortion, lobby to make abortion legal or more available in their country, or perform abortions except in cases of a threat to the woman’s life, rape or incest (even if those activities are funded by somebody else).

On Development Drums this week, we heard about the impact of the global gag rule on women in Africa, in an interview with Dana Hovig from Marie Stopes International. (Full disclosure: my partner works for MSI.)  My expert guests were sceptical that Barack Obama would give priority to reversing the global gag rule any time soon.

But this weekend, we have heard that Obama is preparing to reverse some key decisions that President Bush took using executive authority, including on stem cell research, oil and gas drilling and – according to the Washington Post, the New York Times and Bloomberg – the global gag rule:

President-elect Barack Obama will reverse U.S. family-planning and AIDS-prevention strategies that have long linked global funding to anti-abortion and abstinence education, a public-health adviser said. Obama “is committed to looking at all this and changing the policies so that family-planning services — both in the U.S. and the developing world — reflect what works, what helps prevent unintended pregnancy, reduce maternal and infant mortality, prevent the spread of disease,” Wood said.

These seems like a good time to raise the profile of this important issue, to make sure that reversing the global gag rule is on the list of decisions for President Obama to take in his first day in office.  The Center for Reproductive Rights has written to Barack Obama calling for the repeal of the global gag rule.  Now is the time to make as much noise as possible about this to generate political support for an early decision to reverse this policy.

For more information about the global gag rule, listen to the interview with Dana Hovig in Episode 6 of Development Drums (about 30 minutes in to the podcast).

I know this is all very immature, but I thought this was a funny idea (via):

when you make a donation to Planned Parenthood in her name, they’ll send her a card telling her that the donation has been made in her honor. Here’s the link to the Planned Parenthood website:

https://secure.ga0.org/02/pp10000_inhonor

You’ll need to fill in the address to let PP know where to send the “in Sarah Palin’s honor” card. I suggest you use the address for the McCain campaign headquarters, which is:

McCain for President
1235 S. Clark Street
1st Floor
Arlington , VA 22202

PS make sure you use that link above or choose the pulldown of Donate–Honorary or Memorial Donations, not the regular “Donate Online”

Incentives for Global Health have published a new report:”The Health Impact Fund: Making New Medicines Accessible for All”

The Health Impact Fund, our flagship proposal, is a new way of stimulating research and development of life-saving pharmaceuticals. To provide wide access, medicines need to be affordable-but low prices don’t create strong incentives for innovators to invest in research and development. The Health Impact Fund is an optional mechanism that offers pharmaceutical innovators a supplementary reward based on the health impact of their products, if they agree to sell those products at cost. The proposed Fund is to be financed mainly by governments.

I personally find this idea attractive. It shares a lot of characteristics and thinking with the Advance Market Commitment idea that I have worked on in the past. The main difference is that the AMC leaves patents in place; under the IGH they are signed away. If the pharmaceutical industry is willing to participate, this would be very attractive; my guess is that many firms will find this too challenging to their existing business model.

I’m impressed by the idea of the Welbodi Partnership, a charity supporting the Ministry of Health and Sanitation in Sierra Leone:

The Welbodi Partnership was established to support the provision of paediatric care in Sierra Leone, where child health statistics are the worst in the world.

The cool thing – as Tristan points out – is that:

they work directly with the Ministry of Health and Sanitation to improve the hospital, instead of running their own hospital, as many NGOs like to do. This way, they deliver services and build capacity in the country’s health system.

There are far too many NGOs who, for respectable reasons, set up parallel services. The result is duplication and waste, and foreign-funded NGOs often deplete capacity from already hard-pressed government systems. The Welbody partnership approach seems to combine the best of both worlds.

Does anyone know of other NGOs taking this approach?

The Disease Control Priorities Project has a striking feature article about fistula and maternal mortality

… across much of the less developed world, fistula is an ordinary hazard of childbirth for many women and a permanent blight on countless lives. In those countries, obstetric fistula overwhelming results from obstructed labor, which occurs when the baby cannot pass through the mother’s birth canal because it either does not come head first or is too large for her pelvis. In the developed world, prompt medical intervention, often including Caesarean section, permits a delivery safe for both mother and child. But thousands of times each year in poor countries, birthing women receive no such aid and their labor is a futile agony lasting up to five days, with uterine contractions constantly forcing the baby, usually head first, against unyielding pelvic bone.

Long before the mother’s torment ends, however, the unremitting pressure kills the child. It also cuts off the blood supply to the soft tissues of her vagina and other organs trapped between the baby’s skull and her pelvis. Eventually these tissues also die, forming one or more fistulas, and the baby’s head softens sufficiently for the stillborn child to pass from her body. Should she survive, the mother soon finds urine, feces or both leaking unstoppably from her vagina. In about a fifth of cases, the woman also suffers nerve injury that can cause a condition called footdrop, which prevents normal walking. Constant contact with urine or feces irritates and infects her skin and other tissues. Her kidneys, bladder, or other nearby organs may also be damaged. Her menstrual periods may stop, rendering her infertile.

The stark difference between the experience of mothers in the developing and developed worlds explains one of the greatest discrepancies known in health statistics, that between the rates of maternal mortality in rich and poor countries—a gap that constitutes “one of the most neglected issues of social injustice in the world today,” according to Wall and co-authors.17 Only 1 percent of the more than half a million maternal deaths each year happen in developed nations. In Northern Europe and North America, 11 women die for every 100,000 live births and a woman’s lifetime chance of dying because of pregnancy is 1 in 4,000. In Africa, that risk has been estimated at 1 in 14,18 and in some of the poorest parts of the continent, where over a thousand women die for every 100,000 live births, at 1 in 7.19

… A number of facilities, most prominently the renowned Addis Ababa Fistula Hospital, in Ethiopia, repair thousands of fistulas each year at a cost of about $450 for each operation and related care.²⁶ But still, the number of women suffering the disability and indignity continues to grow, creating a backlog that by some estimates would take centuries to clear, but which others believe could, with appropriate effort, be managed in a decade. And given the limited funds available for maternal care overall, experts differ on how to balance resources between prevention and treatment. In the opinion of Dr. Yifru Berhan, an obstetrician in the Ethiopian town of Hawassa, for example, “it’s unfortunate that we have hospitals to manage the complication but not to prevent the complication.”²⁷

(Declaration of interest: my partner works for Marie Stopes International, whose slogan is “Children by choice, not by chance”. Their work to provide women with access to sexual health services including contraception and abortion, enables women to choose when and whether they want to have children, enabling them to avoid pregnancy when they are very young, to avoid having too many children and to increase the spacing between children, all of which are important ways to prevent this kind of complication from pregnancy and childbirth.)

We went recently to the village of Amber, about 6 hours north of Addis Ababa, to spend some time listening to people telling us about their attitudes to children, marriage, divorce, sex, abortion and contraceptions. (This is part of G’s work; I went along to listen and learn.)

The most surprising thing to me was that, although this is a deeply religious society, there were no social, religious or other concerns about people using contraception and abortion to limit the size of their family. The concern that people have about the pressure on land of having too many children in the community was far more pressing. The only objections to contraception were (perceived and real) side effects and the practicalities (and cost) of getting it.

More photos here.

Michael Clemens at the Center for Global Development is one of the smartest (and nicest) people who think seriously about development. What I particularly like is his willingness to challenge conventional wisdom – and to back his judgements with well-researched evidence. When he had doubts about the common view that it was a bad idea for industrialized countries to “poach” health workers from developing countries, he didn’t just put a theoretical argument – he went to Africa to gather data and interview health workers there to understand their stories. His blog post today If Congress Admits More Foreign Nurses, Will It Be Responsible for Killing Children in Poor Countries? Think Again is a good example of the clarity of his thought:

Africa needs stronger health systems, to be sure, but can we build those systems with our immigration policy? There is no scientific evidence that this has happened anywhere, or is possible anywhere. We should be very hesitant to force real people with real families to accept wages that we would never accept, without overwhelming and indisputable proof that by itself this blunt act does enormous good.

Bill Clinton has finally been persuaded that investment in health systems is more important than funding “vertical” initiatives for particular diseases:

“That’s increasingly in the last few years what our foundation has been focused on – what is the most cost-effective way to mobilise a national health system,” Mr Clinton said.

“You can get the universal treatment – the money’s there now, if we spend it most effectively.”

“But we don’t have the health care systems to reach out to people, get them tested and diagnosed in a timely fashion, get them on treatment and do the regular follow-ups.”

Well good. This is what the aid experts have been saying for years. It is why many of us opposed the establishment of funds like the Global Fund for AIDS, TB and Malaria and PEPFAR in the first place. But politicians like to announce things that they think their public will understand, and big disease-specific initiatives are the kind of thing that seems to fit the bill.

According to Hugh Williamson in the FT the 8 richest countries are stepping back from the commitment they gave in Gleneagles to increase aid:

Leaders of the Group of Eight rich nations are set to backtrack on their landmark pledge at the Gleneagles summit in 2005 to increase development aid to Africa to $25bn a year. A draft communiqué obtained by the Financial Times, due to be issued at the group’s July summit in Hokkaido, Japan, shows leaders will commit to fulfilling “our commitments on [development aid] made at Gleneagles” – but fails to cite the target of $25bn annually by 2010.

To be fair, the only evidence for this given by the FT is that the draft G8 summit makes no reference to the figure. In some ways this may seem pedantic – failing to repeat the number is not the sane thing as renouncing it – but for those of us who watch summit language carefully, this is a significant ommission. If the countries meant to to keep their promises, they would make a virtue of it by restating the commitment. The only possible reason for dropping the language is that they no longer believe they will live up to it.

In some ways, however, this is more worrying:

In a further retreat, the G8 is set to abandon its Gleneagles promise to provide universal access to Aids treatment and prevention by 2010. The pledge has been a benchmark around which health campaigners and others have been organising their work, especially in Africa.

Universal access to AIDS treatment is a much better target than the aid target. In principle, we should be setting targets for what we plan to achieve, not targets for how much we plan to spend (which creates perverse incentives to spend more, rather than achieve more value for money).

Scientific American discusses the need for better forecasting of need for drugs and vaccines:

Unpredictable demand creates a three-way catch-22 problem, as pointed out in a 2002 study commissioned by the GAVI Alliance, formerly the Global Alliance for Vaccines and Immunization. Poor countries have to know the price of a vaccine to see if they can afford it. Manufacturers, however, are hesitant to set a price unless they know how many doses will be bought. And aid donors cannot be sure they can subsidize a purchase without knowing the price and quantity of the sale. Vaccine purchases have occurred anyway, but not without difficulty. In 2002, when GAVI convinced suppliers to manufacture extra courses of an existing vaccine against Haemophilus influenzae type b, poor countries were slow to buy it. "We were very naive at that time and thought countries would take up the vaccine much faster than they did," recalls Michel Zaffran, the group's deputy executive secretary. "The tools that we had available were very poor."

I am not personally convinced that the problem is forecasting demand in the sense of uncertainty about how many doses of vaccine we are likely to need. In principle, the number of children in a cohort, the extent to which they are at risk of particular diseases, and the the capacity of health services to reach them with vaccines, are all likely to vary little from one year to another. 

The big driver of uncertainty in demand seems to be the behaviour of donors, capriciously moving money from one priority to another according to the latest political priority or development fad, or unpredictably dumping their unspent budget at the end of the year on easy-to-buy goods such as pharmaceutical companies.  As well as improving our techniques for forecasting demand, we need to take a long hard look at how we can make aid budgets more predictable, so that developing countries have much more information with which to plan, long in advance, how many drugs and vaccines they will be able to afford.