This blog post originally appeared on the Center for Global Development Global Health Policy blog.

Maurice Hilleman may have saved more lives than any other scientist

Maurice Hilleman may have saved more lives than any other scientist.  He developed eight of the vaccines widely used around the world:  for measles, mumps, hepatitis A, hepatitis B, chickenpox, meningitis, pneumonia and HiB. Hilleman worked throughout his career at Merck, a pharmaceutical company.

Last week, donors pledged $4.3 billion to GAVI to help immunize 250 million children by 2015.  Most of this money (over 80%) will come from four donors: the UK ($1.3 billion), the Gates Foundation ($1 billion), Norway ($677 million) and the US ($450 million).    Other donors also generously doubled their previous commitments, and Japan and Brazil gave for the first time.

We should heap praise on donors for this. Childhood vaccination is among the most successful and cost-effective development interventions (pdf).  When the Expanded Programme on Immunization (EPI) was launched in 1974, less than five per cent of the world’s children were immunized during their first year of life. Today, about 80% of children receive the basic package of six life-saving vaccinations (polio, diphtheria, tuberculosis, whooping cough, measles and tetanus), saving about 3 million lives a year.

And what a difference it has made.  Smallpox has been eradicated. Polio may be next.  The number of children dying of measles has declined by about 80% from 733,000 deaths in 2000, to 164,000 in 2008.  It is easy to become complacent about success on this scale.  Now that many fewer children die of these diseases, we are in danger of forgetting that they were ever a problem, and the role that vaccination has played in ridding us of them.

We have not only the medical technology, but also the health systems, skills and logistics to reach children across most of the developing world. So we could also reach children with vaccines which are still considered too new or too expensive to be widely used in developing countries, including those against pneumococcal disease, rotavirus, meningitis,  hepatitis B, yellow fever, cervical cancer, rubella, typhoid, and Japanese encephalitis.

Backing vaccination with big money is an astute political move. Taxpayers understand the idea that every child should have the same vaccines as their own children; and vaccination programs clearly work.

This is not just good politics: it is good development policy too. DFID recently conducted an exhaustive review of the value for money for the taxpayer from 43 multilateral organisations.  GAVI was one of the top-rated organisations, along with UNICEF and the Global Fund.  Vaccination is one of the most reliably cost effective, life changing development interventions that money can buy.  It ought to be a no-brainer.

Save the Children UK and ONE both ran impressive campaigns supporting a large GAVI replenishment, and the new donor commitments were welcomed across most of the mainstream development community.  But a small number groups – notably Médecins Sans Frontières and Oxfam – have criticized the way that GAVI works.  (For example, Daniel Berman from MSF appeared on Newsnight to criticize GAVI).

These groups are clear that they support the objective of greater access to vaccination; but they say that donors could make better use of the aid budgets by by pushing pharmaceutical companies for lower prices. They have accused GAVI of having too cozy a relationship with drug companies, which have two representatives on GAVI’s 27-person board.

Getting a better deal

MSF and Oxfam are certainly right that lower prices would mean that a given vaccine budget could go further: we could immunize more children, and so save more lives.  If we think vaccination is important for development, we should do whatever we can to make it as widely available as possible. Oxfam and MSF say they want GAVI to take three steps:

first, full transparency about the prices GAVI pays; second, forceful action by GAVI to use competition to get a better deal; third, all pharmaceutical companies should step down from the GAVI Board because of their clear conflict of interest.

I have no argument with the first objective, and I’m glad to see that UNICEF has announced that it will be publishing vaccine prices on its website.

But the other two objectives (getting ‘a better deal’, and removing pharmaceutical companies from the GAVI board) are seem to me to be potentially reckless.

There are, in principle, two kinds of ways to cut prices.  One way is to reduce the cost of developing and producing new vaccines.  These include simplifying regulations, shifting production to lower-cost places, and reducing or diversifying risk.  The second way to cut prices is to squeeze producers, and so get a better deal for purchasers by reducing the profits of the pharmaceutical companies.  We might be able to do this, for example, by using the market power of UNICEF (which purchases vaccines on GAVI’s behalf) to push prices down, or by bringing more suppliers into the market so that competitive pressures make it harder for any firm to make big profits.

The first kind of price reduction – reducing costs – is a net benefit to society (other things being equal).  If we can do it, we should.  There is a big and important agenda to pursue here.  Long term commitments to GAVI, enabling long term contracts with pharmaceutical companies, are an important way to bring down the costs of production.  GAVI can play an important role, and I would argue (indeed,I have argued) they should be doing it more.   Amanda Glassman and colleagues set out a great agenda on this in a recent working paper.

The second kind of price reduction – transferring surplus from producers to consumers – is a zero sum transfer from the shareholders in pharmaceutical companies to governments and aid agencies.  That may be desirable on distributional grounds but it may have long-term consequences which we come to regret.

We want pharmaceutical companies to develop new vaccines, and to improve existing vaccines.  For diseases which hardly ever affect rich countries – like malaria – we want them to go ahead and develop the vaccine anyway.  And when they invent a new vaccine for diseases which affect people everywhere, we want them to trial those new vaccines in poor country settings as well as industrialised countries and, if they work, to invest in manufacturing capacity to produce the millions of doses needed to vaccinate people  across the developing world.

So this is the dilemma: we want pharmaceutical companies to invest more in developing and producing new vaccines and drugs for developing companies.  But once they’ve done so, we want those products to be available at the lowest possible price, ideally free.

Be careful what you wish for

In simple economic models, we don’t need to think too hard about protecting the interests of companies. We encourage competitive markets, and let competition drive the price down to the marginal cost.  That enables firms to make a reasonable return on their capital, leaving the rest of the surplus in the hands of the consumer.

But drugs and vaccines are different in a crucially important way.  They are characterised by massive up-front costs of research, development and testing, and relatively low costs of production once the vaccine has been approved.  These products are only profitable if the companies have some way to recover their up-front development costs.

So what should the price be?  If the price is forced down to marginal cost – as it would be in unrestricted competition – the firm which has developed the product will never recover the costs of its investments.  If we want the firm to consider doing this again (or indeed to consider doing it in the first place) then the price paid to the firm has to stay above marginal cost, at least for a time, so that the firm gets its money back.

An imperfect answer to this has been the patent system: to grant the firm a temporary monopoly so that it can keep the price above marginal cost and recover those development costs.  But this way of paying development costs has huge disadvantages: namely that charging higher prices excludes some consumers from the product. That may not be a problem if the product is an MP3 song or a computer game, but it is a helluva  price to pay when the product is a life-saving vaccine.

The other potential problem with paying above marginal cost is that firms may be able to make excess profits. We want firms to be able to cover their costs, and reward their shareholders for the risk they have taken, but we don’t want them to hold society to ransom if they have invented a life-saving drug or vaccine.

So we want a mechanism which gives firms a reasonable return on their investment but which does not allow them to make excessive profits.  That in turn means neither allowing competition to force the price down to marginal cost, nor allowing firms to charge inflated prices.

Achieving both access and innovation

Oxfam and MSF want to see more manufacturing by producers in developing countries, as a way to bring the price down.  Such a move has two effects: one good and one iffy.  Moving production to lower-cost locations may bring down the total cost of production: that must be good.  But companies  are not going to invest in future vaccines if they know that they will be undercut by manufacturers making copies of the new product, having borne none of the development costs.  So untrammeled competition may be good in the short run, if it brings down prices, but bad in the longer term if it chokes off future investment in these products.

The analysis of the vaccine market by Oxfam and MSF alleges that prices are too high.  The entire policy agenda rests on the judgement , so it is unfortunate that the report offers no evidence to support it.  All the report tells us is that ‘actual prices are not determined in a simple way by, or justified by, R&D costs’.

Just because Oxfam and MSF offer no evidence for their claim doesn’t mean that they are wrong.  Perhaps we are paying too much for these vaccines, and the companies are making excessive profits in these markets.  After all, a lot of other business are making a lot of money out of the aid industry.  It is hard to tell, because these companies are extremely secretive about the actual costs of development and production (in a way that I find rather sinister and which certainly does not help their cause).  I have no difficulty believing that many pharmaceutical companies would be trying to make profits from developing countries if they could.

Here’s why I don’t think that is very likely that they are.  We don’t see firms lining up to develop new products to tackle the health problems of people in developing countries. We don’t see them rushing new products to market in developing countries.   We don’t see them investing in the adaptation of existing products, or in the investment of large scale plant needed for large scale production.  On the contrary: over the decades before GAVI was established, we saw fewer and fewer firms seriously engaged in medicines for developing countries.  If firms are making huge profits on selling drugs and vaccines for developing countries, why isn’t there a gold rush?

That isn’t a very satisfactory basis for a judgement. But let’s consider the balance of risks.  If I’m wrong, and we are overpaying for vaccines, the damage is that some of the aid budgets of rich countries is unnecessarily bloating the coffers of Big Pharma.  But vaccines are a hugely cost-effective development intervention: even if we were paying twice as much as we should for them, they would still be saving lives more cheaply than almost anything else we do. And as news spreads of the handsome profits to be made, more firms and investors would be attracted into developing, manufacturing, registering and selling new products for developing countries. But if Oxfam and MSF are wrong, then driving down the returns to pharmaceutical companies will reduce their interest in these markets.  There will be less research; less investment in large-scale production; and products will be brought to markets more slowly. The consequence will be that millions of people will be denied access to life-saving products.   Given that we can never get the prices exactly right, I’d rather err on the side of making these markets too congenial for pharmaceutical companies, and so attract more businesses to the field, than making the environment too hostile for them and driving them away.

The MSF and Oxfam paper implies that they believe that prices should be pushed down to the lowest possible level, because this will increase access. If that is their view, they do not tell us how firms will be encouraged to engage in these markets in future; if that is not their view, they offer no insights into how they would prevent the price from falling too far or how we would know when we’ve got there.

The value of partnership

One way to achieve a combination of innovation and investment (requiring higher revenues for firms) with access for the citizens of poor countries (requiring lower prices paid by purchasers) is to use aid budgets to make up the difference.   GAVI has a huge role to play in making this happen. Making developing country markets more valuable for private investment is a legitimate, high-value use of aid.  But we put those benefits at risk if we have appear to have ideological objections to using aid to support good returns for pharmaceutical companies when they engage in developing countries.  That is why I’m concerned about the recommendation that the pharmaceutical industry should be kicked off the GAVI board.  Max Lawson of Oxfam calls this the ‘thorniest issue’.

GAVI was established as an alliance of governments, international organisations, donors, research organisations, firms and civil society working together to increase access to vaccinations.  The 27-seat board has one seat for an industrialised country firm, and one for a developing country firm.   Those firms are hardly over-represented: there are ten government seats.  Civil society also has one seat – exactly as many as rich country pharmaceutical firms.  Every member of the board has a profound interest in the decisions of the alliance – sometimes a shared interest with the other stakeholders, sometimes competing interests.

The benefit of having pharmaceutical companies engage in the alliance is obvious: they understand the economics of their industry better than anyone else. If we want to figure out what we need to do to get more vaccines produced for and distributed in developing countries, we have to work closely with the firms who do it.

That model is yielding benefits.  Vaccines against pneumococcal infections have been rolled out much more quickly in developing countries, not long after they became available in industrialised countries, in stark contrast to the 15 year delay in the roll-out of previous vaccines for HiB and Hepatitis B.  GAVI has brought together governments and firms to bring down the price of rotavirus vaccine for developing countries.

MSF and Oxfam are not entirely explicit about what they see as the main risk of industry participation but their main concern seems to be that firms have somehow overcome their numerical inferiority to capture the GAVI board, leading it to collude to pay too much for vaccines. If that were true, it would indeed be a matter for concern.  But it depends again on their view that prices are too high.

Given their concern to bring down prices, and ensure access in the least developed countries, MSF and Oxfam could speak out more energetically against  PAHO’s  ’most favored nations’ clause which prevents vaccine companies from charging least developed countries a lower price than they charge in wealthier middle income countries like Brazil.  Yet the NGOs seem strangely reluctant to take this on.  Perhaps attacking the pharmaceutical industry is easier, if lazier, than challenging the policies of governments of emerging markets?

Let’s show some love to Big Pharma

My colleague Charles Kenny has shown that over the last century there have been massive improvements in the length and quality of life even in countries whose incomes have hardly changed. Countries with GDP per person of $300 in 1999 have approximately the same life expectancy (46 years) as people had in 1870 in a country with an income ten times as great. Charles lists five countries in which incomes fell by an average of 18 percent over forty years, yet life expectancies increased in all of them over the same period, by an average of 40 percent.  How has this happened?  In large part as a result of the development and use of vaccines, drugs and contraceptives.

Development of new medicines has almost always depended on a combination of public and private investment.  As we know from the story of Maurice Hilleman, many of the most important breakthroughs have come from scientists working in pharmaceutical firms.

Chart showing how the relationship between infant mortality and income has changed over the last century

There is plenty of reason to maintain a healthy suspicion of pharmaceutical companies. There are plausible allegations of unethical clinical trials, misrepresentation of data, irresponsible marketing and corruption. I find the industry’s obsessive secrecy sinister.  I don’t like the industry’s zealous protection of intellectual property rights, which inhibits the spread of ideas and society’s technological progress.  I share the widespread suspicion of companies that are too big, too rich and too powerful.   I’m sure that many pharmaceutical companies would be happy to gouge the market if they were given the opportunity to do so.   Nonetheless, it is a shame that an industry which has done so much good for humanity – including in developing countries – is so widely vilified.

We have seen massive improvements in health in the last fifty years, far outperforming growth in incomes, as a result of new vaccines and drugs mainly brought to us by private pharmaceutical companies, on a platform of scientific research conducted in or funded by the public sector. You could make a pretty compelling case that the pharmaceutical industry has done more than the aid industry to improve the lives of poor people.

Conclusion

The decision last week by a group of donors to put a lot of money into GAVI to pay for vaccination was one of the very smartest, most humane decisions they could have taken.  They have been generously praised from many quarters, and rightly so.

A combination of publicly-funded research and the market-driven engagement of pharmaceutical companies has resulted in the development and production of vaccines and drugs which have had a huge, positive impact on people’s lives in both rich and poor countries.  We don’t want firms to be making excessive profits, least of all out of the aid budget.  But I see no signs that this is what is happening.  If anything, the opposite seems to be true.  Over the years, partly out of an abundance of concern to increase access by keeping prices down, we’ve made things tough for firms wanting to sell to developing country markets. The result: not enough vaccines and drugs for diseases which mainly affect people in poor countries, and too slow a roll-out of new products.  If we want to reverse that, we should be trying to make these markets more profitable.

Of course it is important to bring down the price paid by developing country governments, to prevent high prices from excluding poor people from access to these life-saving products.  We should do everything we can to bring down costs – including looking again at how we can cut the regulatory burden, take advantage of low cost production, and reduce uncertainty.   But we should be very cautious about driving down prices merely by squeezing pharmaceutical companies harder. We have to weigh our pleasure from poking the rich and powerful in the eye against the enormous damage we will cause if we drive firms out of these markets. A much smarter if less satisfying approach is to use aid budgets to bridge the gap between reasonable returns to the pharmaceutical industry and prices that the developing world can afford.

Declaration of (non) interest:  neither I nor any programme on which I work is funded, or has ever been funded, by the pharmaceutical industry.

Though the effects of aid on development are uncertain, there is a huge amount that industrialised countries can do – or not do – which affects how quickly countries develop.  The policies of rich countries on trade, investment, migration, the environment, security and technology can make a huge impact on how quickly poor countries are able to develop.

Yet we tend to judge industrialized countries too much according to how much aid they give, and too little to how they behave in all these other ways.

The Center for Global Development provides an essential service by ranking the rich each year so we can see how we are doing.  They use a series of quantitative measures on all these dimensions to create a composite picture of how a country’s policies affect development. The 2010 results are now in.

The overall rankings in the 2010 Commitment to Development Index

For people in the UK who feel smug about the UK’s approach to development, the Commitment to Development Index makes pretty sobering reading. The UK is in 16th place, out of 22 countries in the index.

The UK has fallen ten places since 2005, when it was in joint fifth place, after only Denmark, Sweden, Netherlands and Norway.

The UK is one of only three countries to have got worse rather than better since the index began in 2003. (The other two are Denmark – which started at the very top, and Switzerland.) And this isn’t a point about the change of government: Britain was 16th last year too.

Given that the UK has a relatively generous and effective aid programme, why does it come so far down the league of overall impact on development?

In short: arms exports.

The Commitment to Development Index uses three measures of a country’s security policy.  It tallies the financial and personnel contributions to internationally mandated peacekeeping operations and humanitarian interventions. It rewards countries that base naval fleets where they can secure sea lanes vital to international trade.  And it penalizes arms exports to undemocratic nations, on the grounds that putting weapons in the hands of despots can increase repression at home and the temptation to launch military adventures abroad.

The UK is by far the worst of the the 22 nations in the index on selling arms to poor and undemocratic governments.  UK arms exports, weighted for undemocratic and unaccountable states, are four times worse, as a share of GDP, than the next worst arms exporter, the United States.

The bars shows the scores from 2003 to 2010in each of the 7 dimensions

As well as being stand-out bottom of the pack on arms exports, the UK does badly on migration policy, because it takes too few unskilled immigrants and students for its size; and technology policy both because Government R&D spending is unduly focused on defence, and because the  UK tends to pursue intellectual property rights policies that are not in the interests of poor countries, such as allowing patents on plant varieties, and pushing to incorporate into bilateral free trade agreements “TRIPS-Plus” measures that restrict the flow of innovations to developing countries.

Critics of aid often argue that we should focus more on helping countries to develop, rather than what they call ”handouts’ to poor countries.  In that context, they usually mention the need for more open trade with developing countries.  That is certainly important. The Commitment to Development Index suggests that they should also be advocating changes in UK policy to: reduce arms sales to undemocratic countries, accept more unskilled immigrants, increase the number of foreign students, remove patents on plant varieties and stop arguing for TRIPS-plus.

The UK gets credit for its environmental policies, mainly because it has done relatively well on limiting carbon emissions and because of high petrol taxes. Global warming has a disproportionately negative impact on developing countries, so these measures have an important impact on developing countries.

Many British people are proud of the UK’s commitment to reducing poverty in developing nations, and Britain’s model of an independent development agency within Government led by a separate Cabinet Minister is widely admired.  But is it working?    Judging by the scores in the 2010 Commitment to Development Index, the UK is  doing a better job at securing and spending a rising aid budget than it is at getting the rest of government to pursue development-friendly policies.

The Kaldis coffee shops clearly drawn more than a little inspiration from Starbucks – the logo, green aprons, and decor of the coffee shops will be familiar to anyone who has visited a branch of the Seattle-based chain (which has not yet arrived in Ethiopia).

The coffee in Kaldis is much, much better than Starbucks, however.  Ethiopians take their coffee very seriously and it is deeply embedded in Ethiopian culture; from the prolonged “coffee ceremony” in towns and villages up and down the country, to the sipping a machiato with the Sunday papers in one of Addis Ababa’s many cafes.

Tseday Asrat, the owner and founder of Kaldis, makes no secret of drawing her ideas from Starbucks.  According to the New York Times,

”I’ve always loved Starbucks, the ambiance of it,” said Tseday Asrat, the proprietor of Kaldi’s, fessing up to the obvious inspiration behind her year-old business. ”So we created our own version of it here.”

Ethiopian friends tell me that she was challenged about this on Ethiopian radio. Did she feel guilty about stealing ideas from Starbucks? “Not at all”, she apparently replied. “After all, they stole our coffee.”

It is a nice story; and there is a lesson. One of the unsolved mysteries of development economics is why inequality has grown so much in the twentieth century. Never in the whole of human history has the world been so unequal. In the past, poor societies would “catch up” with richer and more technologically advanced societies, usually by adopting their technologies. New agricultural methods, such as crop rotation and fertilizer, would spread. The spinning jenny, steam engines and factory production lines were adopted all around the world. But in the twentieth century an increasing proportion of the important technologies that make our society rich are subject to patents, copyright protection and trade secrets. Whether it is the composition of pharmaceuticals, new varieties of seeds, software we use to run our businesses and governments, or complicated fertilizers, the knowledge that underpins the wealth of our societies is more and more protected.

In the sixteenth century, double entry bookkeeping spread rapidly across Europe from Venice, enabling merchants to manage their firms much better and so contributing to rising prosperity. The idea was adopted the world over. But today’s technologies to improve the management and productivity of firms – from Microsoft Excel to enterprise management software – cannot simply be copied by firms in poor societies. The consequence is that it is much harder for firms in poor societies to compete, and catch up is much slower.

The intellectual property rights regime which aims to create incentives for innovation in industrialised societies has an unintended (and probably unnecessary) consequence of making it much harder for poor countries to catch up. I’ll be writing more about that issue here in future.  In the meantime, let’s celebrate Kaldis, which takes a good idea and makes it even better.

PS apologies to everybody who subscribes to this blog by email who got a meaningless email today. I allowed some software to create a temporary test page on my blog, stupidly forgetting that it would send out an email alert automatically.  I’ll do my best not to make that mistake that again. Clearly I’m new to computers.

Rich countries have many reasons for wanting to help poor countries. The main three British political parties speak in their manifestos of Britain’s obligations to the developing world (Lib Dems); moral duty, common interest and poverty emergency (Lab); and enlightened self interest and commitment (Cons).  The combination of motives – moral concern for others and self-interest – is a strength of the development cause, not a handicap.

These motives translate into two broad classes of objectives for development policy:

• One view is that development assistance should help to accelerate economic and institutional change in developing countries. The idea is that temporary support from outside can be a catalyst for permanent changes in developing countries. As economic growth takes off, developing countries will no longer need our help.  This view is attractive both to donors, who do not want to go on giving aid for ever, and for recipient countries who do not want to continue to be aid dependent.  For shorthand we will call this the transformation objective of development assistance.
• Another view is that development assistance can improve people’s lives today. This is most obvious in the case of humanitarian relief, for which the objective is to provide food and shelter; but more generally a lot of aid is used to send children to school or provide basic health care.  On this view, the development process is long and hard, and one role for outsiders is to enable people to live better lives while this process is happening in their country. Let’s call this the solidarity objective of development assistance.

It is entirely reasonable for countries, organizations and individuals to care deeply about both the transformation and the solidarity objective, and they can coherently pursue both objectives at the same time.

From time to time, people try to make connections between these objectives, positive and negative.

The claim of a positive connection is the idea that spending money on health and education is an investment in the human capital of a country, and that this will, in time, lead to faster economic growth.  Some point to significant investments in education in fast-growing Asian economies as evidence that education spending will promote growth.  Others say that improving health will lead to a demographic transition, in which falling infant mortality leads to smaller family sizes and greater investment in each child.  Both of these stories are appealing, though unfortunately neither is very well supported by the evidence.

The possibility of a negative connection is that the things that donors do to support people in developing countries as a matter of solidarity may actually slow down the political, social, institutional and economic changes that the country needs for transformation.  It may sustain unaccountable governments in power; undermine the social contract between citizen and state; hollow out fragile government institutions; cause appreciation of the real exchange rate and so choke off exports; or create a culture of dependency that dims demand for social change.  Again, the empirical evidence for these (quite plausible) ideas is pretty thin (pace the claims of Dambisa Moyo).

Are we using the right tools to pursue our two types of objective: tying to catalyze transformation, and at the same time to help people live better lives?   I think we are focusing too much on aid and not enough on development policies.

It is quite straightforward to see that aid can help meet solidarity objectives.  It is used to provide clean water and food, and to finance public services such as health and education.  There is quite good evidence that it is effective, though there is much more to learn about how to do it better.

It is much less clear that aid achieves our transformation objectives. The statistical evidence linking aid to economic growth is, at best, uncertain (see The Anarchy of Numbers by David Roodman).  This does not mean that there is no relationship – it is much harder to demonstrate a statistical connection when there are few countries to observe, and so many factors as well as aid that are likely to affect whether a country achieves economic lift-off.  We can think of aid being to growth what venture capital is to start-ups: many investments will fail, but the huge benefits from the few that succeed may make the losses worthwhile.

I personally have my doubts that aid makes much difference to the prospects for economic and social transformation.  Countries change from within, through long, slow, organic processes, and it is hard to see how money and advice from outside can make much of a difference to that.  Consider our own history, and the decades and centuries that it has taken us so far to construct our social and political institutions.

If we are serious about promoting transformation, we need to look beyond aid to how we can change the environment in which developing countries are struggling to change their economic, social and political institutions. Transformation is much likely to take root if we create conditions in which it is likely to succeed.

What are the development policies that might contribute to this?

1. Trade policy – As well as duty-free, quote-free access for all developing countries to our markets, we have to dismantle the complex rules – such as rules of origin and phyto-sanitary standards – which make exports complicated.
2. Agriculture policy – We have to stop dumping subsidized agricultural over production abroad, especially as our aid conditions prevent developing countries from competing with us. We also have to stop using food aid as a welfare system for European and American farmers.
3. Climate change – If anthropogenic global warming is a reality, as is the consensus among scientists, then the harm we are doing to developing countries through climate change will become one of the most important obstacles to development.  Probably the most important thing we can do to accelerate development is to stop our own carbon emissions.
4. Conflict – We make and sell the guns that are used in conflicts in developing countries.  We buy the oil and minerals over which groups are fighting.  We sustain the unaccountable leaders in pursuit of our geo-strategic interests.   If we were serious about development, we would by now have stopped the Lord’s Resistance Army in Uganda – it would be a simple matter for a well-resourced army.
5. Immigration – In the 18^th Century, a third of Europeans moved to America, to the benefit of both continents.  In the 20^th and 21^st century we have introduced historically unprecedented restrictions on the movement of people – notwithstanding our rhetoric about globalization. These restrictions may be the single most important factor which explains why poor countries have not been able to converge on rich countries.
6. Intellectual property – Another constraint on the ability of developing countries to close the gap is that there are historically unprecedented constraints on their ability to appropriate technologies. For centuries, new agricultural techniques such as crop rotation spread through word of mouth.  During the industrial revolution, America and Europe were able to use technologies from Britain.  When Henry Ford invented the assembly line, the idea was rapidly adopted everywhere.  But today’s technologies – from business software to pharmaceuticals and biotechnology – are protected by patents that make it impossible for other countries to adopt.
7. Corruption – We often think of corruption as a problem of developing countries, but this ignores the fact that the money for corruption comes from, and often returns to, industrialised countries.  Rich western companies pay bribes, in return for access to contracts or minerals.  To his eternal credit, President Jimmy Carter introduced the Foreign Corrupt Practises Act, which made it harder for American companies to pay bribes abroad. But there is much more we could do, if we were prepared to take on the vested interests of our own multinational companies, to reduce corruption in developing countries.
8. International governance – In our own nations, we have long ago dropped the property qualification for representation; but internationally we do not think that it is strange that representation in our main institutions is based on wealth and power.  This matters because again and again, the interests of developing nations are ignored, or treated only as a footnote.  From banking secrecy to internet peering arrangement, the rules of the game are set by the wealthy in their own interests. Changes to these practices which would be irrelevant to most of us, but could make a huge difference to the prospects for development, are resisted by powerful vested interests from industrialized countries.

It is entirely reasonable that industrialized countries want both to promote transformation in developing countries, and to help people there to live better lives while that process is taking place.  Aid has been proven to be an effective instrument for meeting our solidarity objective, but it is far less clear that it is a significant driver of transformative change.  Our political rhetoric focuses on the idea that development policies should promote transformation.  Yet it seems unlikely that aid is the most useful tool we have for achieving this.  If we are serious about transformation we should invest  more time and effort in creating the global environment in which economic and social change are more likely to succeed, by changing our policies and behaviours on issues like trade, agricultural policies and immigration.

Many people who work in development are directly or indirectly dependent on aid. Government development agencies gain their bureaucratic position from the size of their budget.  International NGOs get a lot of their money from aid budgets or from private charitable giving.  Partly as a result, the debate about development too often shifts to aid: whether it works, how much is given and by what means.  These are important questions, but primarily for the important goal of helping people in developing countries to live better lives while they are waiting for, and helping to build, a more prosperous and fair society.  If we are serious about accelerating the transformation, it is our development policies, not aid policy, that we should be discussing.

What are examples – some realized and some on the table but untested – for practical action in the interests of global prosperity? Where do good ideas come from? How do they get translated into action?

Nancy’s ten:

1. More AMCs for vaccines and green technology
2. Protect some aid from security and political objectives
3. Independent evaluation agency
4. More representative G-20
5. Visas for people from poor countries
6. Duty free, quote free access to all markets
7. Per capita distribution of net income from non-renewables
8. Reform of selection of heads of international agencies
9. World Bank to have a global public good window
10. Petrol tax in the US

Ever fizzing with ideas, Nancy throws in a few others: endow think tanks in low-income countries; increase capital at development banks; Climate Investment Funds to bring private investment money;  Cash On Delivery Aid; new insurance and risk management instruments at the multilateral development banks.

Well I agree with all those, of course (and not just because I’m a visiting Fellow at CGD!).   She asks for other suggestions.  Here are my ten:

1. Global standards for transparency and traceability of all aid to increase accountability and effectiveness
2. Climate justice – every person in the world to have equal, tradeable, carbon emission rights, capped overall at the level scientists tell us is safe
3. Global information sharing among tax authorities to prevent tax evasion
4. Unbundling of aid funding from aid delivery, complete untying and global standardised output and outcome indicators to enable cost comparisons
5. A global minimum income guarantee backed by cash payments to the world’s poorest people
6. Product traceability from sweatshop to supermarket using barcodes
7. A complete ban on exports of small arms
8. A standing, professional  UN peacekeeping force to be deployed by a reformed Security Council
9. Reform of intellectual property to permit free access in the lowest value markets
10. Increasing the share of aid to LDCs from 38% of global aid today to 90% by 2012.

Update 25 February: On Twitter, Nancy Birdsall (@nancymbirdsall) says: “@OwenBarder has 3 more actionable ideas (and 7 dreamy ones)”.  This is a good game: which of these does Nancy think are actionable and which are dreamy?  My guess is she thinks (1), (3) and (9) are actionable and the rest dreamy.   But what do you think?

I think they are all realistic – but then I’m with John Lennon: “You may say that I’m a dreamer, but I’m not the only one. I hope some day you’ll join us, and the wo-o-rld will live as one”.

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.

we are all in this together.

This is a powerful message.

When 15 million people  face starvation in East Africa this Christmas, let us say:

we are all in this together.

When twenty thousand children die tomorrow from easily preventable and treatable diseases, purely because they don’t have enough money to buy drugs that cost cents to produce but for which we charge rich world prices, let us say:

we are all in this together.

When the developing world demands proper compensation for their part of the atmosphere, which we have filled up with carbon emissions far beyond our share, resulting in the risk of destruction to entire nations, let us say:

we are all in this together.

When the people of the Niger Delta demand a share of the wealth lying beneath their ground, and an end to the environmental destruction caused by our oil companies so that we can drive our cars and cool our houses, let us say:

we are all in this together.

When we complain about corruption in the developing world, forgetting that all the money that pays for those bribes comes from us, and then choose not to prosecute our own companies that pay the bribes, let us say:

we are all in this together.

When we continue to be one of the largest manufacturers and exporters of arms in the world, fuelling conflict all around the world, but are more concerned about a hundred jobs on the Isle of Wight, let us say:

we are all in this together.

When people are forced to leave their homes, their family and their country because they lack freedom or face persecution, or because they cannot find work that pays them enough to support their family, and they look for a new beginning in rich countries, and we decide how we will treat asylum seekers and immigrants, let us say:

we are all in this together.

When the world’s poor demand fair payment for their coffee, cocoa, and minerals, and for their labour which provides us with the cheap clothes and electronics which we take for granted, let us say:

we are all in this together.

When the world economy recovers, companies of the rich world begin to prosper, when bankers get their bonuses again and the rich start to become richer, and we decide how to share the proceeds of that growth within and between nations, let us say:

we are all in this together.

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.

First, taking something for nothing, without permission, and with no compensation for the person who created and owns it, is wrong. Simple as that.

With respect, it is not as simple as that.

The reason this looks plausible is the use of the word “taking”.   If I take something from you, that implies that I now have it and you no longer do.  If it was yours to start with, that would be unfair (or, in Mr Mandelson’s word, “wrong”).  But the challenge for making good policy about intellectual property is that the goods in question are non rival – meaning that one person’s consumption does not come at the expense of another person’s consumption of the same good.  If I make a copy of a song and listen to it on my MP3 player, that in no way reduces your ability to listen to it.   So I have not “taken” it from you.  We can both listen to it.  The marginal cost to society of my listening to the song is zero.

Mr Mandelson may have meant by “take” the idea that if I neglect to pay you for something, you lose out.  But this isn’t necessarily wrong.  As Chris Dillow points out, if I give a lift to a friend, I deprive a taxi company of revenue.  The taxi company might not be very happy about that. They might lobby the Business Minister over cocktails on a yacht, requesting that taxi companies be given a monopoly on giving rides in the area they serve.  (After all, they have spent a lot of money on cars and offices.)  The Business Minister should tell them to get stuffed.   There is no basic right to make money on your investments, and being deprived of potential revenue is not the same thing as a cost.

As I explained in more detail here, the economics of non-rival goods is quite different from the other kinds of goods.   Intellectual property rights are a social construct to create temporary monopolies which, unlike other forms of property, worsen rather than increase static allocative efficiency.  For non-rival goods, allocative efficiency requires that the price is zero, but dynamic efficiency may require some sort of remuneration for the creators of the products.  A society may choose to restrict access to a product as a way to create financial incentives for innovation. This may be worth doing if the welfare gains from the incentives to innovate exceed the welfare costs of reducing access to the products.  But that trade-off does not automatically and necessarily come down in favour of having intellectual property rights, nor is the creation of intellectual property rights the only or the necessarily the best way to create incentives to innovate.

This is not a wholesale argument against intellectual property rights.  But it is an argument against the daft claim that intellectual property rights are just the same as rights to rival goods such as physical property.   Property rights for rival goods increase, or at any rate do not diminish, allocative efficiency and hence welfare;  property rights for non-rival goods decrease allocative efficiency, and that is a welfare loss that has to be justified by a welfare gain elsewhere.

We do need to reward and incentivize innovation and creativity appropriately.  But I am struck by the lack of imagination and innovation in the current debate about how we do it.  Intellectual property rights are one approach, but they have important drawbacks.  We should not forget other possible approaches – such as prizes, buy-outs, or public funding – which might secure many of the same benefits without the costs.

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).

The point isn’t that private property is a bad thing, or that the state should be able to run roughshod over the rights of individual owners. Property rights (including patents) are essential to economic growth, providing incentives to innovate and invest. But property rights need to be limited to be effective. The more we divide common resources like science and culture into small, fenced-off lots, Heller shows, the more difficult we make it for people to do business and to build something new. Innovation, investment, and growth end up being stifled.

But for the reason I have set out here in more detail, this critique of intellectual property rights concedes too much.

It is true that society needs economic incentives to invest in research and
innovation, and that one way to do that is to create artificial temporary
monopolies (such as those provided by so-called “intellectual property rights”). But
we should not be seduced by the language of “property rights” into
thinking that ideas protected by patent are like other kinds of “property”. There is an important econmic difference between the consumption of ideas and the consumption of other things: consumption of ideas is “non-rival” – that is, my use of an idea does not preclude you from using the same idea. So if we prevent someone from using someone else’s idea, we deprive them of a benefit that would have cost the rest of us nothing at all, and that is generally bad economics. (That is why some free-market economists are also sceptical of intellectual property.)

The state is “riding roughshed” over its citizen’s rights not, as Surowiecki has it, when it does not enforce patents, but rather when it creates them in the first place. That doesn’t mean there should not be any intellectual property rights – there is a defensible utilitarian argument for granting some temporary monopolies to create returns for innovators – but we should be clear that it is the establishment and enforcement of patents, not limiting them, that amounts to state interference in the freedoms of the individual.

Hat tip: Tom Watson

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.

This has been the year fans have increasingly taken music into their own hands, rejecting the over-processed diet served up by many major labels in favour of something a little more homemade. In the process they have notched up numerous high-profile successes, including Arctic Monkeys, Arcade Fire, Clap Your Hands Say Yeah, Spinto Band and Nizlopi.

It does seem to me broadly right that it is in the interest of songwriters and performers that people should be able to share music, rather as many of us did with cassette tapes many years ago.