Vaccinations & varieties of capitalism
Variation in the speed of vaccinations provides insight into the shape of the immediate economic recovery as well as the medium-term outlook
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The remarkable speed in developing vaccines offers the prospect of a return to economic and social normality. But as events in Brussels this week show, the ability to vaccinate populations quickly is a big test for advanced economy governments.
There is substantial variation across countries in vaccination speed. Israel and the UAE have vaccinated ~60% and ~36% of their respective populations. The UK has also moved quickly, after emergency approval was granted and early vaccine orders placed; it has a vaccination rate of ~16%. And the US (~10%) is now beginning to hit its stride, with a more structured approach to nationwide vaccinations.
But Europe is lagging: the EU27 has a vaccination rate of just over 3%. There is criticism of the delivery of the EU-wide vaccine purchasing policy. And there are complications in the logistics of national vaccination programmes.
Asian countries, which face less immediate public health pressure because of their success in controlling Covid-19, are starting a bit later. That said, Singapore is now moving quickly, with >3% of the population already vaccinated.
Countries that vaccinate faster will likely have a faster recovery process, with greater space to open their economies quickly. Indeed, Israel and the UK have seen market support for their currency and equity markets on expectations of a more rapid normalisation.
Varieties of capitalism
The UK see their strong record as an example of the type of agility they have after Brexit. And to an extent this is correct (although it doesn’t offset the structural costs of Brexit).
But there is a broader point: the speed of vaccinations is a function of different economic and political models used across countries. Comparative political economy identifies ‘varieties of capitalism’ in different countries, which are good at different things.
A standard distinction is between liberal market economies (LMEs) and coordinated market economies (CMEs). LMEs use decentralised, competitive and flexible market mechanisms; CMEs rely more on established informal, relational arrangements between a range of stakeholders.
There are not systematic differences between LMEs and CMEs in overall economic performance. But there are important differences in economic behaviour. For example, the incentives in LMEs support disruptive innovation (think Silicon Valley start-ups) whereas models of incremental innovation are more common in CMEs (both in large industrials as well as the Mittelstand).
In the current context, countries that have moved fast on vaccines – such as the UK and the US – are liberal economies that have institutions and norms that support disruptive innovation; the ability to move fast, to innovate on delivery, and with a higher risk tolerance. And although not a standard liberal economy, Israel has a demonstrated ability to mobilise across the economy and to innovate.
The UK and the US have had a generally poor Covid response, with weak, inconsistent measures and communications, but they are leading in the vaccinations phase. They moved early to finance research and manufacturing, signed early contracts, issued emergency vaccine approvals – and have managed the delivery relatively well.
The CME model seen in Europe (at EU and national level) is more process-heavy, with a lower risk tolerance, and uses existing mechanisms. This model of incremental innovation can be very efficient in normal circumstances (European public health systems are well-regarded), but these are not normal times – and standard processes were not sufficient for disruptive events.
This gives LMEs an edge over the next several months, with an impact on economic and health outcomes. But by the end of 2021, vaccinations in European economies will likely have narrowed the gap with the leading countries, with improved growth then likely.
The slow pace of vaccine deployment has shown some of the limitations of the CME model in Europe. But differences between LMEs and CMEs may begin to work to the advantage of European economies in a post-Covid world.
Liberal economies like the US have prospered in an age of disruptive innovation over the past few decades. The US has produced multiple technology companies at scale, while Europe has produced few unicorns.
But the global economy is changing. Previous small world notes have discussed the possible shape of a post-Covid global economy, highlighting stronger growth prospects in areas such as industrial automation and clean energy.
Although US technology stocks have performed very strongly over the past 12 months, so too have clean energy and industrial automation stocks. These may be areas in which CMEs have an advantage.
Clean energy, for example, relies on strong government involvement (regulation, infrastructure) and industrial firms that are good at scaling up technology gradually. The green and digital ambitions in the EU’s €750b Recovery Package will be helpful.
CMEs that can combine capabilities around incremental innovation with agility and responsiveness are well-placed. Indeed, the World Economic Forum’s recent Global Competitiveness Report assessed that several small advanced economies from the Nordics to the Netherlands were well-positioned for a post-Covid world due to strong innovation capabilities, social insurance and labour market systems, and so on.
The recovery from the Covid-19 crisis will be a marathon not a sprint. The sluggish start to vaccinations in Europe is intensely frustrating and costly, but may not be a good guide to the strength of the medium-term recovery.
Get in touch if you would like to discuss this analysis and its implications. I am also available for presentations and discussions on other global economic and political dynamics, and the implications for policymakers, firms, and investors. Do let me know if your organisation is interested in arranging a discussion.
Chart of the week
The Economist Intelligence Unit published its annual Democracy Index this week, noting the worst score for the strength of global democracy since the index began. Again, the rankings are dominated by small advanced economies: Norway, Iceland, Sweden, and New Zealand top the Index. Although this is not the same as effective governance (note the low ranking of high-performing Singapore), this is a useful perspective on the likely responsiveness of governments.
I prepared a paper for the Institute for Emerging Market Studies at the Hong Kong University of Science & Technology on challenges and opportunities for emerging Asian economies in a post-Covid world. Existing growth models will need to be adapted, and there will likely be a much broader range of outcomes across these economies.
Small economies around the world
The Lowy Institute published international rankings of country performance in responding to Covid-19, which was topped by New Zealand. They found that ‘smaller countries with populations of less than 10 million people consistently out-performed their larger counterparts throughout 2020’.
Singapore has committed to grow its manufacturing activity by 50% over the next decade, moving into increasingly advanced manufacturing. At ~20% of GDP, Singapore already has one of highest manufacturing shares of any advanced economy. This diversified sectoral profile has been beneficial through the Covid-19 crisis.
Finland is looking to position itself for growth in EVs and renewable energy by creating a battery industry, exploiting its natural resources. And the world’s longest undersea tunnel (100km) between Finland and Estonia is back on the agenda.
Economies ahead in vaccinations are poised for stronger recoveries: Israel’s stock market has surged over the past few months, significantly out-performing the S&P500 and European indexes, as inflows bet on a relatively strong outlook.
New Zealand’s borders will likely remain closed through the end of 2021 according to the Prime Minister. And some of the partial exceptions, such as the Australian bubble, have been temporarily stopped because of a handful of cases over the past week or so that have got through the quarantine arrangements.
Denmark has secured political agreement to construct an island 80km offshore in the North Sea to support wind energy capacity that will generate 10GW when fully developed. The US$34 billion public/private project will be the largest construction project in Danish history, and is part of meeting Denmark’s carbon neutrality target.
And General Motors is taking on Norway in its latest Super Bowl ad, starring Will Ferrell.
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