Back to autarky? How to respond to supply shortages in medical devices during the Corona-crisis
The ongoing covid-19 crisis has brought to the fore the vulnerability of societies relying on highly efficient global value chains (GVC) and single suppliers for specific goods.
During the crisis, which first severely hit China as the central link in many GVCs, most countries have suffered a shortage of both simple and technologically complex medical devices (e.g. face masks and ventilators respectively). Fierce competition for these devices has emerged, leading to global tensions and trade restrictions, but also to a discussion about the organization of supply-chains and the need for national emergency stockpiling of medical devices.
However, as the discussion also reveals, many political mistakes have played a significant role in creating the supply shortage. First, it seems that health systems in the West relied too heavily on a single country, China, for the supply of face masks and other devices. Second, many governments were complacent with respect to devising precautionary pandemic plans. Take the German case: in 2012 the German Parliament, the Bundestag, requested a simulation of a pandemic outbreak from the Robert Koch Institute (RKI), the official German agency for infection research. The RKI provided a realistic scenario, and therefore had much insight for responding to the current crisis, yet it was not consulted when it was becoming clear in early 2020 that covid-19 was a potential public health threat.
Despite such policy failures, most commentators concentrate on the way markets work and demand a public provision, or at least domestic production with government protection of such medical devices, in combination with domestic stockpiling. When thought through carefully, the discussion questions the global division of labor, particularly since it is always a welcome invitation for interest groups in other sectors to freeride on protectionist impulses. The Corona-crisis may thus intensify the process of de-globalization we have been witnessing over the last few years (through re-shoring, 3D-printing etc.). Therefore, this debate needs clear analysis that highlights the potential benefits and costs of both strong reliance on domestic suppliers and of increased stockpiling.
A cost-benefit analysis of national autarky
The potential benefits of domestic supply of medical devices and a well-organized and timely process of their stockpiling are obvious. A sufficient supply of urgently needed medical devices and medicine is in the public interest. Nevertheless, the way to achieve this objective is far from obvious.
A currently popular suggestion to solve the problem of supply shortages is to rely completely on domestic production in order to be independent from foreign supply. There are enormous costs of such a strategy. Relying on national production instead of foreign supply may first lead to much higher costs of supply. If it is much cheaper to rely on international suppliers then it is also essential to rely on a number of suppliers – this is a commonplace, which has been neglected in the past.
The second downside of an outright protectionist reaction in one country may be that others follow suit, leading to a serious distortion of the international division of labor. As a consequence, a protectionist seesaw emerges. Particularly in a crisis of global dimension, one should avoid unreasonable nationalistic responses.
A second strategy, which may either complement a protectionist policy or not, is sufficient stockpiling, meaning that the government provides stocks of medical devices to ensure the provision for a majority of people in case of a crisis. This strategy is in use in most countries, the unknown quantum being the size of the stocks in question.
To stock enough material for most citizens has at least two problems. First, it binds capital, which could be used alternatively (opportunity costs). Furthermore, it is unclear whether the goods in stock will ever be needed as each pandemic will create its own specific demand for medical devices.
The counter-argument is that stockpiling can be treated as an insurance that binds resources. However, such insurance stock will become outdated over time due to technological progress, and may quickly become useless. Finally, since crises are unexpected (otherwise they would be quickly overcome), the stockpiling may provide protection for the wrong crisis – in other words, the devices in stock will not solve the next problem.
Thus, it is worthwhile to consider alternatives. Neither autarky nor the reliance on a single foreign source are good strategies. It may be desirable to find a realistic combination of forward-looking demand-steering, innovation and health policy combined with a diversified mix of global and domestic supply chains. In detail, one may think of three basic domestic strategies.
- First, governments can support hospitals when they negotiate with foreign suppliers; they may even consider forming central purchase agencies. Ideally, there should be more than one agency per country competing for the hospitals’ orders to avoid conflicts of interest or corruption.
- Second, long-term contracting with several suppliers may protect from dependencies. Again, the state can support the medical industry along the lines discussed above.
- Third, stockpiling remains a solid idea, if the stocks are regularly emptied and refilled. The government can close contracts with hospitals about patterns of stocking and emptying. Thereby, the problem of outdating may be mitigated at least to a certain degree.
In addition to national strategies, there is scope for international cooperation, be it on a regional or global level. Experiences in the European Union may help with organizing this process.
- First, stockpiles can be held for a group of countries, so that the turnover of material in stock is larger and the risk of outdating is smaller. The country groups could consist of a blend of industrialized, emerging and developing countries, thereby mitigating the risks for developing countries and offering development assistance by cooperation. As a start, already existing development partnerships could be deepened. However, it will not help in a world-wide simultaneous crisis like the one we currently witness. Nevertheless, it will reduce the costs.
- Second, it may be possible that countries either in the abovementioned groups or in different patterns form coalitions and finance joint research projects which will again reduce individual countries’ burden. The World Health Organization (WHO) may support and coordinate such initiatives, without compromising stimulating competition between research teams.
- Third, the World Trade Organization (WTO) may help by clearly defining approved subsidies devoted to R&D expenditures in this. Again, the problems of developing countries may also be taken into account.
The current discussion on the security of supply of fundamental medical device holds a distinct threat of throwing the baby out with the bath water. It is reasonable to view the currently concentrated production and supply patterns for such devices as suboptimal. However, instead of resorting to nationalistic responses such as autarkic supply chains, it will be much more beneficial to all concerned to use the Corona-crisis to develop a global approach to avoid similar problems in future crises. This analysis has presented a few suggestions which undoubtedly need more detailed consideration. Nevertheless, they seem worth considering.
By Andreas Freytag – Professor and Chair of Economic Policy, Friedrich Schiller University, Jena.
This work is licensed under Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
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