The Economic Rationale for the ACT Subsidy Kenneth J. Arrow Amsterdam 18 January 2007

I. The Economic Problem A. Demand or Utility 1. Antimalarials in general: 1 million or more deaths/ year  Severe economic costs in adult life 2. Artemisinins: Resistance to chloroquine and sulfadoxine-pyrimethamine (SP) B. Externalities 1. ACTs: Slowing emergence of resistance to artemisinin compared with monotherapy: externality to the future 2. Cross-national spread of resistance: “global public good” 3. Local externality: high coverage reduces transmission (at least if latter is not too high)

I.The Economic Problem continued C. Supply: manufacturing 1. Cost of production: 20-fold increase (very roughly) over previous antimalarials. 2. Combination doesn’t add to costs 3. Investment encouraged by predictable demand 4. Predictable demand also encourages entry, competition, and incentives to innovate. D. Supply: local—The problem of distribution, an essential point 1. Public, private, and NGO alternatives 2. The chloroquine and SP experience: 70% of distribution in Africa was done by private enterprise. Very wide distribution geographically 3. The importance of speedy treatment in malaria: importance of availability

I.The Economic Problem continued E. Ability to Pay  Average annual incomes, $1,000 and less  Considerable inequality Example: ~80% of the populations in Ethiopia, Zambia, and Zimbabwe live on $2/day or less. Retail price for chloroquine or SP: $0.10/course For artemisinins or ACTs, up $20/course. Even at the factory, the costs of ACTs are about $2/course.

II. The Functions of Subsidies A. Need: Hardly requires discussion. B. Criteria: First, we want ACTs to be used as freely as chloroquine has been; therefore the retail price of ACTs should be the same as the current price of chloroquine. Second, we want to prevent artemisinin monotherapy. That also requires a low price.

III. The Location of Subsidies Local: Advantages and Disadvantages Advantage: possible to target subsidy to the needy; more just, cheaper. But really impractical; administratively complex, most of population need aid. Disadvantage: Impossible to reconcile with competitive private distribution.

III. The Location of Subsidies continued B. Global The chief alternative is a global purchasing “agency.” It will buy ACTs of various kinds at a market price determined by competition among the producers. It will provide guaranteed purchasing power for a market but not guarantee any one firm’s sales. Entrants with lower costs or different products (but always a combination of drugs) can be assured of a place to compete. A centralized purchasing agency will have additional value in promoting quality control and making registration easier.

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