A Better Way to Vaccinate the World: Interview with Professor Michael Kremer

Michael Kremer is a development economist and University Professor in Economics at the College and the Harris School of Public Policy, University of Chicago. A 2019 Nobel Laureate in Economics, he joined the University of Chicago in 2020, and has since founded the Development Innovation Lab, a research center which focuses on improving lives in developing countries. Professor Kremer is also known for his extensive research using randomized control trials, the O-Ring theory of economic development, and the creation of “advance market commitments” to incentivize vaccine production, particularly for developing countries.

Below are edited excerpts from a conversation between Professor Kremer and the Chicago Policy Review’s Paul Zaporzan on advance market commitments, their role in the COVID-19 pandemic, and lessons going forward. The full interview can be found here.

 

CPR: For those unfamiliar with the term, what exactly are “advance market commitments”, and can you tell us a bit about how they were designed?

Michael Kremer: The general issue is one of patents and intellectual property rights. Those are designed to encourage innovation, which is key to economic growth and to the huge health improvements the world has seen over the past century. But while they’re designed to encourage innovation, they do that by giving inventors or product developers monopoly rights to sell the product. A standard principle of an introductory economics course is that monopoly rights can sometimes limit access. That’s technically inefficient because the social cost of producing the good might be pretty modest.

Yet, the producer obviously wants to make a profit, but they need to be covering their large fixed costs. So, they charge more than the literal production cost, and that means some people who can pay the production costs but can’t pay the price don’t get it, and that’s economically inefficient. And of course, that inefficiency is compounded if this is a vaccine or a drug against an infectious disease, for all the standard externality reasons. If I take the vaccine, that doesn’t just help me – in effect, it helps everybody else in society.

Because we’re talking about drugs and vaccines, we’re talking about things that are incredibly important to human life, literally. The lower quantity that gets sold when there’s monopoly pricing means some people don’t get drugs and vaccines, and that can be deadly.

At the same time, we need the research incentives to get the products produced in the first place. There are arguments why intellectual property rights should be stronger, why they should be weaker. But as long as you’re just varying the strength of intellectual property rights, you’re pinning off these two very important social goals – incentives for innovation and access to the fruits of those innovations – against each other.

The idea of advance market commitments was to try to simultaneously advance both objectives. It was focused on the lack of vaccines for diseases that were common mostly in low-income countries. The idea was to commit in advance to help finance the purchase of the [socially] efficient vaccine quantity.

CPR: How can AMCs be thought of in the context of COVID vaccines? What’s different this time?

Michael Kremer: A normal vaccine timeline is at least three to four years from initial testing to large-scale commercial use. Some manufacturing capacity would be installed initially, but large-scale installation would only occur after the completion of medical trials, and that’s a very long process. But speed is very important during a pandemic. Every month, COVID-19 is killing hundreds of thousands of people, and it’s reducing global GDP by hundreds of billions of dollars.

The purpose of advance market commitments or advance contracting for COVID-19 vaccines was to accelerate the production process and perhaps also incentivize the R&D. But the key purpose was to make sure capacity was installed at large scale, and was parallel to (not after) the testing process.

CPR: To what extent are costs prohibitive in augmenting private companies’ capacity to produce vaccines (i.e., what are the implications of firms failing to consider the social benefits of the vaccines)?

Michael Kremer: As I’ve emphasized, it’s very different from drugs. For most therapeutics, if you have the formula, a generic producer can produce it. Vaccines are much tougher, and lots of things can go wrong. So, it is a major decision for a firm to sink a lot into a plant. There’s also the issue that they might be worried about, “Hey, if we sink all this into production, are we going to be able to recoup it?”

Let me be specific. You might think that all of the major vaccine manufacturers really jumped on this, but there are actually some major vaccine manufacturers, who – I don’t want to say they didn’t make an effort – but they did not make an effort to measure it with the social need. I think being able to reduce the risks for companies is pretty important, and I do think that the response of companies can be affected by the incentives.

One key thing is that the social value of a vaccine is much, much greater than the prices. To go in a little bit more detail on a point I made earlier, the IMF is estimating global GDP losses for COVID-19 at $12 trillion during 2020-2021. Those numbers are a little bit outdated, but that would work out to average monthly GDP loss of $500 billion. More comprehensive estimates including the health losses and the education losses are actually many, many times larger.

CPR: At which stages of vaccine development and production do you think governments should intervene to maximize net benefits to society?

Michael Kremer: I would say that speed is incredibly, incredibly valuable during a pandemic, and the private companies don’t have sufficient incentives to accelerate vaccination; they don’t get paid $1,000 per dose, but they also don’t get paid on a schedule. I think because of the benefit of speed, it makes sense to invest in manufacturing capacity in parallel with testing, so it makes sense for governments to be involved at that stage. Lots of countries did that, and we’re seeing the benefits.

At this stage, I think an important thing is to think about how to use existing capacity more efficiently. We’d like to still get proposals, solicit proposals for more manufacturing capacity, but there might be more we can do with existing production capacity. We’ve seen what the U.K. has done, and Canada, in terms of going from “first doses first” policies, where there’s a longer gap between the first and second dose so more people can get the first dose – that’s delivering 75% protection – more quickly.

Another possibility I think is really intriguing and we should at least experiment with is trying to see if it’s possible to use smaller doses. When I say “experiment”, I don’t mean clinical trials necessarily, but you could start with studies designed to look at immune response – different than the phase 3 clinical trials which take a really long time and involve really large numbers of people. But there’s some reason to believe that you might be able to get by with much smaller doses.

CPR: How harmful are patents in this context? Should legislation be introduced to ban patents on vaccines which have benefits of this magnitude (while integrating an AMC-like program to maintain incentives)?

Michael Kremer: I think there are multiple ways to structure advance market commitments.

One approach is to layer an advance market commitment on top of patents. That preserves research incentives because it’s voluntary for companies. They only take the AMC deal if they are going to not be financially hurt relative to having a patent under which they sell to high-income countries first and then 10 years later sell to lower-income countries.

Another approach would be to say, “Let’s make this mandatory. The way you get compensated is you sell through – it’s not a voluntary deal, it’s a mandatory deal. We’re not going to buy from you unless you agree to these terms.” I think your position on that might depend on how much you value research incentives versus how much you value getting access to the drugs and vaccines that we already have. I think both objectives, research incentives and access, are both really important, and I would hope we would design systems that allow us to get both.

CPR: How have developing countries been impacted by their relative disadvantage in purchasing power?

Michael Kremer: Right now, people in the U.S. are getting vaccinated and shortages are disappearing. Even young and healthy people are getting vaccinated while in India, there’s a terrible tragedy unfolding. In Brazil, vaccine supplies are very limited, and people who are at much, much, higher risk of death from COVID-19 – elderly people, people with preexisting conditions (various types) – are not vaccinated. What can we do to address that?

First, some high-income countries that ordered a lot are (or were) holding back on releasing supplies. That obviously comes at a very high price for other countries. I think a particularly extreme example of this was the U.S. had a bunch of AstraZeneca vaccine – which is not approved in the U.S., and we were sitting on it – when we’ve got plenty of Pfizer and Moderna, which have very high efficacy. Meanwhile, Mexico and Canada didn’t have vaccine or they had very small supplies. So, the Biden administration eventually moved to say, “Hey, we’re going to lend the vaccine doses. So, if we need them back, we’ll get it back”, because for example, Canada ordered a lot, it’s just not arriving quickly.

I think trying to get the world protected is a moral imperative. But it’s also in our narrow self-interest because the longer the virus is out there, the more people are infected, the more opportunity there is for mutations, including mutations that could spread back to the U.S., potentially. They could be resistant to vaccines and come back, so I think that’s now the critical problem facing the world: accelerating access for the places that don’t yet have it. Taking bids on more capacity, releasing the doses that we have that can be released. You have to be politically realistic as well about what’s actually going to happen.

CPR: What are some lessons going forward with regards to vaccine production and distribution in future pandemics?

Michael Kremer: To prevent future pandemics, it’s really going to be critical to make sure we’ve got lots of spare capacity and stockpiles of the things that are needed to ramp up production quickly once we have a vaccine. And that includes manufacturing capacity for vaccines, but also capacity and stockpiles for inputs to vaccine production like adjuvants, bioreactors, or lipids. We also need some public funding to help support the costs of maintaining stockpiles and standby capacity. Like insurance, we might pay for it for a while and not need it. But it’s worth taking that “risk” that a pandemic doesn’t happen again for 30 years. Doing the math on that suggests it’s worth it.

But let me emphasize something that’s not so obvious. It’s not just the direct benefit of having the stockpiles. Shortages are just really destructive in a bunch of ways. Again, a basic lesson of economics. If the price doesn’t rise to the market-clearing level, that might be totally appropriate. But it does mean that people really want to grab hold of vaccines. How do they do that? A bunch of ways. For example, export controls. A lot of countries have either threatened to or actually put on some sort of export controls to keep the vaccine at home or to keep the ingredients for the supply chain at home. Another one we were just talking about: hoarding of vaccines. “Well, we might need it, so we better hold onto it.”, as opposed to the terrible crisis going on in India right now.

Politicians are responsible to their constituencies. They have very strong incentives to get reelected and not to be accused of favoring other countries’ citizens over their own. I think it’s not enough to make the moral appeal; you also need to change incentives. The fundamental way to change incentives is to make sure we’ve got enough capacity and stockpiles so that either we don’t have shortages or they are mild and transient. Then, the incentives of the politicians to allow vaccine exports will be much stronger.

Behind the veil of ignorance, so to speak, we might be able to sign up to an enforceable system – it’s only going to be enforceable if we build up the capacity – where, really, there can be lots of shots on goal, and all countries can have access to the most successful vaccine.