More than half of all available COVID-19 vaccine doses have been ordered by wealthier nations; meanwhile, many of the world’s poorest countries may be unable to vaccinate more than a fifth of their populations by the end of this year. A team of economists affiliated with the University of Maryland, Harvard University, and Koç University, in Turkey, recently published a study about the potentially disastrous consequences, emphasizing both economic and moral imperatives for increasing worldwide access to COVID-19 vaccines. The authors of the study (which was commissioned by the International Chamber of Commerce) found that unequal vaccine access among countries will likely lead to a “total cost for the world” between $1.8 trillion and $3.8 trillion, with up to half the losses paid for by wealthier nations. In contrast, the cost of vaccinating one-fifth of the world’s vulnerable population, as the World Health Organization’s COVAX initiative aims to do, would cost less than forty billion dollars, with expenses decreasing over time.
I recently spoke over Zoom with Selva Demiralp and Muhammed A. Yildirim, two of the paper’s authors. Demiralp, a professor of economics at Koç University, previously worked at the Federal Reserve Board in Washington, D.C. Yildirim is an assistant professor at Koç University and an associate at the Center for International Development, at Harvard. During our conversation, which has been edited for length and clarity, we discussed the biggest problems the global economy will face if poor countries go unvaccinated, why certain government efforts to prevent economic collapse have worked better than others, and why policymakers don’t always plan well for the future.
Equitable distribution of vaccines across countries is important for reasons of fairness and human decency, but why is it important for the self-interest of wealthier nations?
Muhammed A. Yildirim: Let me say that I think the moral argument is the most important argument, but moral arguments sometimes don’t work. We still have a lot of poverty in the world. We still have all the things that we are dealing with, like global warming and so forth. But putting that aside, we are living in this super interconnected world, right? So everything that we do, any item that we use, some parts come from China, some parts come from Mexico, and everything is co-integrated and gives us the products that we use every day. So, as economists, we simplify; we try to understand how this works. So we divide these types of interactions into categories.
The first category is final goods: the iPhone that we use as consumers, or computers that we use, or the bar of soap that we use in our everyday life. When it comes to also making these final goods, there are a lot of intermediate skills that are exchanged between countries and industries. And those are also affected. Because, if Turkey is experiencing the pandemic, let’s say, and the United States is not, and Turkish workers are experiencing sickness and so forth, what would happen is that Turkish workers would not be able to make the intermediate inputs needed for the U.S. industries to be used in their final products.
On the other hand, Turkey also makes some final products. And those also use intermediate inputs from the United States. American producers wouldn’t be able to send their intermediate inputs to Turkey. But this is not just two countries; this is happening globally. So, if you treat this disease in advanced countries only, because of the trade relationships, the advanced economies will still be affected tremendously. So that’s the bottom line of the paper. Even without the moral argument, if you’re thinking about this in terms of return on your investment, it makes sense to do this investment of vaccinating other nations.
Selva Demiralp: As economists, when we make decisions, we compare the costs with the benefits. So, in the paper, we calculate the costs of inequitable distribution of vaccines. And, under certain assumptions—and suppose we say advanced economies are vaccinated in half a year, and emerging markets can only vaccinate half of their population by the end of the year—in this scenario, we find that total global costs can be as high as $3.8 trillion. And advanced economies, due to the links that Muhammed mentioned, bear about fifty per cent of this. So, then, what we are comparing is if you contribute to something like COVAX and enable two billion doses of vaccines, you just need twenty-seven billion dollars more. But, if you don’t, and you allow the rest of the world to suffer, and let the pandemic drag down their economies, then advanced economies are going to face something close to two trillion dollars. So, when you compare twenty-seven billion dollars with something close to two trillion dollars, then the decision is trivial for an economist—you should actually invest in this COVAX initiative and avoid paying a higher toll down the road.
I think the way many people perceive the relationship between richer countries and poorer countries now is that poorer countries produce goods that rich countries then consume in some way. Why is this too simplistic?
S.D.: Clearly the relationship is much more complicated. Rich countries also have export relationships. They produce and sell to emerging markets, so, if emerging markets are still suffering from the pandemic because their income levels are low, they won’t be able to afford those goods from advanced economies. So advanced economies won’t be able to sell those exports to emerging markets. That’s one channel, plus advanced economies also import intermediate goods from emerging markets; you use those goods in order to produce your final good. So, if Turkey produces steel, which is imported by America to produce a car, and if Turkey is suffering from the pandemic, there are lockdowns and we cannot produce that steel. Then the United States won’t be able to produce the final product, which is the car. So American production is going to decline because of the ongoing pandemic in Turkey.
M.A.Y.: We looked at the industrial costs in the advanced economies and emerging markets and compared them. The most affected sectors are the manufacturing sectors, because they need the imports from the other countries. So it’s not the case that supply chains were simply divided into raw materials versus final goods, or that emerging markets were providing the cheap goods. It has become so much more interconnected in the last twenty years or so. So, when we look at the results at the industrial level, in the advanced economies, it’s the manufacturing sectors that get affected the most. In the emerging markets, it’s the service sectors, because, in the emerging markets, owing to the ongoing pandemic, people still cannot go to a restaurant.
S.D.: In the paper, we look at the sector of costs ranked from the lowest to highest for advanced economies and emerging markets in our hypothetical scenario, assuming that advanced economies get the vaccine and emerging markets don’t. The story in emerging markets is very similar to the story that we lived through in 2020, all around the world. We have seen how the services sector collapsed because people are avoiding consuming services that require close proximity.
We say that, in 2021, if emerging markets don’t receive the vaccination, the same story is going to repeat for them. But, for advanced economies, their trade exposure to emerging markets is going to be proportional to their exposure to unvaccinated emerging markets. So the more a particular sector either buys or sells goods to a sector from an emerging market, then the higher the costs borne by the particular sector are going to be.
Which sectors in advanced economies, generally, are most central to what you’re talking about?
S.D.: Agriculture and fishing, wholesale and retail manufacturing, or basic metals: these are the top three most severely affected sectors for advanced economies. And, if we dig down to look at what causes that, we see that their exposure to unvaccinated countries is higher compared with the other sectors.
We’ve now had the pandemic for almost a year. Most people around the world have not been vaccinated, even in rich countries, and we’ve seen a global economic shock. But, at least in the United States and in most of Europe, there aren’t shortages of goods that I’m aware of. You can still buy what you bought before. What have governments done over the past ten months to prevent these shocks to the supply chain that you’re talking about?
S.D.: Well, for one thing, demand declined, and then supply declined. So that’s one reason that we don’t see shortages in the market. And the second factor is that there were unprecedented amounts of monetary and fiscal stimulus. And we have seen that the Federal Reserve has actually done what it had done during the 2008 crisis. They lowered interest rates to zero. They pumped trillions of dollars into the economy. So the idea was to keep the demand alive and allow those households that are most severely affected from the pandemic to have a subsistence level of income. But that clearly doesn’t mean that the demand remains intact. Over-all global G.D.P. declined by about five per cent in 2020, but it could have been worse.
M.A.Y.: Those are the things that government intervention helped with. It would have been much worse. We had a paper about emerging markets and so forth prior to this, and we advised governments to spend. Without the government help, we would have seen shortages. We would have seen many industries collapsing.
S.D.: The pandemic started, and governments were considering lockdown policies, and we wanted to calculate the economic costs for Turkey and emerging markets. And what we have shown in that paper is that an early lockdown policy that effectively contains the pandemic is going to minimize the economic damage, because the sooner the pandemic is controlled, the sooner demand is going to normalize, and the sooner supply is going to be back into force. There won’t be any further people who get sick and drop out of the labor force, and you won’t need to implement lockdown. So one thing I can say is that if we compare those governments that implemented an early and effective lockdown, they were able to shield themselves against the pandemic. And, for them, there were fewer production interruptions on the supply side, and demand was also stronger in places like New Zealand or Sweden or Australia.
Your latest paper is making this point that as unequal as vaccine distribution may be, the economic hit is actually going to be more equal. But the economic hit of the coronavirus has hit rich countries less so far, because they have been able to provide more government support, correct?
S.D.: It depends on the particular policy approach that you have adopted. In terms of growth numbers, the economies of poor countries contracted more than the rich countries. That being said, however, I can say, in general, countries where there’s a larger informal sector were hit more heavily, because most of the stimulus packages or direct transfers are essentially channelled to the formal sector. A country like Turkey doesn’t really receive its fair share.
M.A.Y.: If you give people money through credit, people go buy luxury stuff, right? Like luxury cars. It’s a different type of economic stimulus than if you give money directly to the people in need and ask them to spend.
S.D.: I believe the share of direct transfers compared with G.D.P. is about ten per cent for the United States, but that number was more like five per cent for Turkey, for example, when we did the comparison. And it is important because, in the credit-growth-based stimulus packages, only those people who can have access, who’re eligible to get credit from the bank, will be able to protect themselves. But, in the case of a direct transfer, you actually can target the sectors that are most affected from the pandemic and provide strict income transfers.
Correct me if this is wrong, but in addition to the fairness of getting money to people who are suffering, they’re the most likely to spend the highest percentage of it, too, right?
S.D.: Yes. And advanced economies definitely did better because they could afford more. It’s not actually just the fact that you can afford more. It is also where your budget deficit was when the pandemic started, because, technically, even if you’re a poor country, you can borrow, you can increase your budget deficit, and you can provide the stimulus. But countries that started the pandemic at a bad time, if you already had a high budget deficit, like Turkey, we didn’t have much fiscal space to provide further stimulus. So I guess that’s another thing. If your macroeconomic balances were already healthy when the pandemic started, those countries were able to implement both accommodative fiscal policy and monetary policy, which would be able to offset the negative impact of the pandemic better.
You talk about this philanthropic initiative to pay for vaccines. And the total cost is about thirty-eight billion dollars, correct?
M.A.Y.: We’re saying twenty per cent of the vulnerable population [can be vaccinated with that]. Hopefully, with time, these costs go down, right? Because the vaccines are new, and they’re in the production process. Maybe next year the prices will go down per vaccine. So it’s not going to be five times thirty-eight billion dollars over all.
O.K. But even if thirty-eight billion dollars covers only twenty per cent of the vulnerable population, and even if the prices didn’t go down, we’re still talking less than two hundred billion dollars over all. Without vaccination, the economic losses you’re talking about are several trillion, even for rich countries alone. So this seems like a no-brainer—national governments should step in and just foot the bill.
S.D.: That’s our message.
M.A.Y.: And that’s the argument that you want to support on top of the moral argument, right? Because, when you talk about the moral argument, it was more about “O.K., this is a humanitarian crisis. We should be helping everybody.” You can think of it as poverty. But then we think about poverty, and what governments think about poverty, and development budgets for many countries are less than two per cent of their budget and so forth. But this is something more than a charity thing, right? This is more about an investment for your future.
S.D.: Just to reiterate, our argument is that this is not an act of charity. It’s an act of economic rationality. And the over-all message is that, when emerging markets suffer, advanced economies are going to suffer as well from an economic perspective. The prologue for our working paper is actually a quote from John Donne, “No man is an island.” So we are actually saying that, look, the suffering from other people’s losses is going to affect you in an economic way. So we say no economy is an island and that we are all connected.
There wasn’t enough testing in the United States initially, and people wondered why the government didn’t just spend a ton of money on testing, because it was clearly going to help contain the epidemic, which would help the economy. I don’t know how often a version of this has come up in every national economy, but it does seem to me as a general matter that governments should be very proactive.
S.D.: I would say that when there’s uncertainty it blurs our vision. And sometimes what seems to be very trivial is not necessarily implemented. The same thing happened with mask use. It became very political. And even though a simple mask could have been as effective as a vaccine, governments, especially the United States, didn’t push them. And sometimes a decision, even though the decision might be clear, the governments may have different political views. And, sometimes, although it may be clear to economists, maybe we cannot convey the messages to politicians. For example, at the earliest stages, everybody thought there was a trade-off. Should we save lives? Or should we save economies? But, at that point, very early on, we were saying with our first paper that there is no such trade-off. Even if you keep economies open, people will get worried about the number of cases, and you won’t be able to normalize demand because people will distance themselves from the rest of the world in a voluntary way.
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