How state capacity (or a lack of it) shaped the pandemic's outcomes🍋

Australia's Pandemic Exceptionalism, by Steven Hamilton and Richard Holden, has lessons for New Zealand too

Memories of the Covid-19 pandemic have faded. It is easy to be wise after the event, and reasonable people might make different judgments about government responses, given the knowledge available at the time and uncertainty about what we were facing. Even so, Steven Hamilton and Richard Holden (H&H), two Australian economists based in the US, have written an intriguing book that makes strong judgements on Australia’s performance in the face of the pandemic. Impressively, this reflects the advice the authors were offering as events unfolded. And they are willing to put some clear, broad-brush numbers around the economic impact of decisions and delays, and to outline some specific actions to better prepare for future pandemics.

Slow procurement and deployment of vaccines had economic costs

I do remember frustration at New Zealand’s slow procurement of vaccines, and delays in rolling them out. Vaccines were an obvious key to protecting people from severe illness and death, and to making it possible to open for business as usual — especially once more contagious variants arrived, making border closures and lockdowns unsustainable and ineffective. Details of the procurement process were murky (perhaps reflecting commercial sensitivities), but reports suggested that officials had missed options offered. Some argued that New Zealand should let other countries with greater need (to protect lives) be ahead in the queue, a claim that did not stand up to the slightest scrutiny.

Coastline near Punakaiki, West Coast, South Island. Dave Heatley

H&H say that Australia blundered big time in procuring vaccines. The Government first chose two candidates — AstraZeneca and a local vaccine developed through the University of Queensland. The AstraZeneca vaccine proved less effective than the Pfizer and Moderna mRNA vaccines and had higher rates of adverse side effects. In the end, Australia made little use of it and had to abandon the University of Queensland vaccine. Having passed up earlier opportunities to acquire mRNA vaccines Australia eventually procured them in May 2021 in sufficient quantities to vaccinate the population. H&H say this was “roughly nine to ten months later than should have been the case under any competent vaccine procurement strategy”.

For H&H, a competent purchase strategy, given uncertainties about success, would have been to take options in a diversified vaccine portfolio, and pre-purchase much more than sufficient to vaccinate the whole Australian population. “All it [the procurement strategy] required is the sort of basic economic logic that is taught to first-year undergraduates”. H&H note, for instance, that Canada bought six times the number of doses required for its population.

H&H costed the delay in procuring vaccines, using Australian Treasury estimates of the weekly direct economic costs of lockdowns “relative to a counterfactual scenario where there was no lockdown and no pandemic”. If Australia had procured and deployed vaccines as early as Israel, for instance, it would have avoided additional lockdowns that “cost the nation more than $30 billion in direct economic costs alone – and more in indirect costs”. H&H describe then Prime Minister Scott Morrison’s view that “This is not a race” as “profoundly stupid”. The cost of pre-purchasing an excess number and variety of vaccines would have been far less than these direct economic costs of delay. H&H do not examine the Treasury estimates in detail, but the orders of magnitude of the economic costs compared to the additional vaccine costs make their argument persuasive.

Unlike Australia (at least as described by H&H), New Zealand took a portfolio approach to procuring vaccines according to Phase I of the New Zealand Royal Commission of Inquiry into Covid-19 (NZRC1), but officials anticipated that the supply of vaccines would be limited until at least mid-2021. Small batches of the Pfizer vaccine first arrived in February 2021 already provisionally approved for use. In March the Government announced that it had purchased enough vaccine for the whole population, for delivery in the second half of 2021. But the outcome (in terms of initial vaccine shots in arms) was quite like Australia’s. New Zealand started a little earlier, but from around July 2021, Australia edged ahead in initial vaccination rates. Both countries substantially lagged Singapore, the United Kingdom and Sweden (for example) until at least September 2021. Thereafter they performed better in terms of coverage than other countries that NZRC1 looked at (except Singapore).

Share of people who completed the initial COVID-19 vaccination protocol

NZRC1 commented that “… New Zealand’s immunisation programme was very effective in quickly delivering high levels of vaccine coverage at an overall population level.” NZRC1 found that by combining the vaccine roll out with its earlier “elimination strategy”, New Zealand experienced an exceptionally low level of excess mortality from the pandemic, compared to other countries.

NZRC1 did not examine the economic costs of delays in deploying the vaccine in New Zealand, nor provide detailed comment on reasons for the delay. Despite rumours to the contrary, NZRC1 found no evidence that “New Zealand received lower priority by vaccine manufacturers and distributors in the vaccine supply chain …”. NZRC1 did find that delays in vaccine rollout and uptake among Māori and Pacific people resulted in more hospitalisations and deaths during the Auckland Delta outbreak and likely extended the final Auckland lockdown. Following H&H’s logic, earlier deployment of vaccines would have facilitated safe earlier easing of lockdowns in 2021 and earlier opening of the border. The economic costs of delay relative to GDP were likely as large in NZ as those that H&H find for Australia.

Overall, Australia and NZ weathered the pandemic comparatively well

H&H echo the Australian Treasury in arguing that “the most effective economic policy response [to the onset of the pandemic] would be an effective public health response, while an effective public health response necessitated an effective economic policy response”.

H&H find that overall Australia weathered the pandemic successfully — through a combination of early lockdowns, early closure of the border, rapid provision at scale of financial assistance for affected firms to retain employees, and rapid deployment of vaccines once procured. The excess‑death rate was comparatively low, and the economy quickly rebounded, with robust employment growth up to 2024. New Zealand was even more successful than Australia in avoiding excess deaths through early lockdowns and border closures, and experienced a rebound in GDP, like Australia and the US, at least over the first three years.

Hamilton suggests that New Zealand policy may have influenced Australia’s approach to financial assistance for firms. The New Zealand Secretary of the Treasury at the time was an Australian economist who had previously worked in the New South Wales Treasury.

Both Australia and New Zealand’s financial assistance was better targeted to maintain employment, and more timely and thus more effective than the US’s broad stimulus through cash to households. The US lacked the administrative machinery and political institutions that would have allowed rapid deployment of more targeted assistance. The inflationary and debt effects of the fiscal measures and whether their effectiveness justified later costs are another story — one being tackled by Michael Reddell.

Slowness in approving and deploying RATs also had economic costs

Australia’s slowness in approving and deploying Rapid Antigen Tests (RATs) to replace Polymerase Chain Reaction (PCR) tests, was another costly blunder according to H&H. Ironically PCR testing was too precise (bringing into the test and tracing net too many people who were not or not very infectious). It was also too slow, so testing overwhelmed labs when the more contagious Delta and Omicron variants, with shorter incubation periods, emerged. The health and medical establishment resisted approval and deployment of RATs until the ineffectiveness of a testing strategy based on PCRs became more than obvious. The Australian authorities finally approved RATs for use in November 2021 (a year after the FDA had approved them for use at home in the US). NZRC1 described even longer delays in New Zealand in approving RATs to underpin a testing strategy — early 2022. Neither H&H nor NZRC1 attempted to put an economic cost on the delay in adopting RATs.

H&H think that an optimal strategy, given asymptomatic cases, incubation periods, and increasing contagiousness of successive variants would have been using RATs to do random, frequent large-scale testing. This would have allowed more targeted “stay-at-home” orders in local hotspots and have provided people with confidence to resume or carry on ordinary everyday activity. Based on Paul Romer's work, they estimate that the average Australian would require testing roughly once every four days during the early months of community transmission. Neither Australian nor New Zealand policy makers appear to have examined such a strategy as an option.

H&H give short shrift to the arguments for vaccine scepticism (or, for that matter, the right to refuse tests). They point to the social benefits of high vaccination rates and population immunity that justify mandates of some sort. They acknowledge, though, that different ethical judgements might give greater weight to an individual right to refuse medical treatment in the form of vaccines and tests.

The uneven effectiveness of Australia’s response to the pandemic reflects the different mindsets and capabilities within lead agencies, according to H&H. The economic agencies were well-equipped with a policy development and payments infrastructure that enabled them to rapidly configure and deploy a well-targeted economic response at scale. The health agencies ignored the economic costs of delay. They were overly cautious in following received safety paradigms and had conflicting incentives from existing investments in medical infrastructure. The “medical-regulatory complex repeatedly ignored international evidence and experience … our political leaders capitulated to their advice”.

More broadly, Australia’s political institutions (like New Zealand’s) centralise a lot of power in the federal executive, enabling a rapid and broadly effective response. This “would simply not have been possible in the United States” with its much sharper division of powers across the different branches of government, and between the federal government and the states. The US also lacked a payments infrastructure to undertake a well-targeted and rapid economic response at scale.

State capacity was a key to the successes but a lack had big economic costs

H&H conclude: “If this book is about anything, it’s state capacity”. They point to the federal payments system which enabled support for firms to be put in place, and the Australian states’ ability to quickly set up vaccination hubs and ensure that hospitals adapted and were not overwhelmed by Covid cases.

H&H recommend that Australia prepares for a future pandemic in specific ways, assuming that it could be a respiratory virus. They recommend that Australia should:

• Develop the capacity to manufacture mRNA vaccine (already in progress), while planning a portfolio approach to procuring vaccines.

• Procure and use RATs as soon as they are available (“No more elitist and crony-capitalist monopolisation of testing by ‘gold-standard’ PCR testing.'')

• Completely overhaul its “medical-regulatory complex. Even if we were never to face another pandemic, this would be effort well spent.” Reform would attend to the composition and culture of the complex — so that it better understands the risks of inaction and not just the risks of action.

• Keep investing in its economic infrastructure (for example developing a real-time GST turnover reporting capability).

The New Zealand Royal Commission of Inquiry into Covid-19 has moved on to a second phase, to report by February 2026. Phase II has new commissioners, and new terms of reference which focus on the (interconnected) issues around approval and use of vaccines, testing technologies, and the use of lockdowns. Phase II provides an opportunity to advance our understanding of the economic costs of delay in procuring and deploying vaccines and in approving and deploying RATs, and so to draw sharper lessons for the future than were derived in Phase I.

By Ron Crawford

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St Arnaud Range, Nelson Lakes National Park. Dave Heatley