Strong IP regime not in interest of developing countries

Two well-known economists challenge the view, particularly advocated by neo-liberals, that a stringent intellectual property regime will benefit developing countries.

Ha-Joon Chang and Ilene Grabel

The neoliberal view

IPRs are essential to investment and growth.

IPRs are just like other types of property rights. Absent the protection of IPRs, there will be no incentive for investors to risk their resources in the generation of new ideas or new products. For example, a pharmaceuticals company will only have an incentive to invest in the development of new medicines if it enjoys the sole right to the profits on sales of the new medicine. Likewise, consumers will be unwilling to pay a premium price for Nike products if the company’s trademark were not protected. Without trademark protection, consumers could not be certain if they were purchasing counterfeit goods.

Patents and other IPRs were critical to innovation and investment in industrialised countries during their development. Patent laws were implemented in 18^th-century USA, Britain and France precisely because governments recognised the importance of this protection to the generation of new knowledge, inventions and technological progress. For these same reasons, virtually all other European and North American countries adopted patent laws by the mid-19^th century. As the US National Law Center for Inter-American Free Trade put it: ‘[t]he historical record in the industrialised countries, which began as developing countries, demonstrates that [IPR] protection has been one of the most powerful instruments for economic development, export growth, and the diffusion of new technologies, art and culture’ (1997: 1).

The WTO has strengthened the protection of IPRs. Contrary to a popular view, this will benefit the developing countries.

Until quite recently, developing countries routinely ignored patents and other IPRs, despite national laws governing these matters. For example, Indian drug companies produced cheap copies of Western drugs that were immensely expensive to develop initially. Korean firms produced counterfeit luxury goods, such as Gucci bags, and thereby helped to devalue the status of their brands.

Today, developing countries must protect IPRs to the degree that they are protected in industrialised countries. Thanks to the trade-related aspects of intellectual property rights (TRIPS) agreement of the World Trade Organisation (WTO), many countries must extend patents to formerly unprotected areas, such as pharmaceutical products (as opposed to pharmaceutical processes, which were already protected in many developing countries). Under the TRIPS agreement, many developing countries are required to extend patent life to 20 years. The TRIPS agreement allows countries that have been harmed by IPR violations to impose trade sanctions on violating countries.

The opposition of many governments in the developing world to the TRIPS agreement is short-sighted. True, developing countries now have to pay substantial royalties to obtain patent licences, but the numerous medium- to long-run benefits that accrue from IPR protection far outweigh the economic costs of TRIPS payments. First, protection of IPRs encourages innovation and foreign investment. Second, enforcement of TRIPS makes it easier for developing countries to gain access to advanced technologies and products. This is because inventors and investors will no longer fear that they will be denied their rightful profits because of IPR violations. Third, firms in industrialised countries will be more willing to create products and technologies specifically for developing countries (such as medicines to fight tropical diseases) now that they no longer fear IPR violations.

Rejection of the neoliberal view

The protection of private IPRs is not a prerequisite for the generation of new knowledge in all circumstances.

Before turning to other matters, we consider first the exact meaning and implication of IPRs in the neoliberal view. For neoliberals, only private actors are to enjoy IPRs. In other words, neoliberals argue that individuals or corporations as legal persons should be granted property rights over ideas. They argue that there will be no incentive for innovation, investment and technological progress absent the possibility that monetary profits will accrue to individuals or firms. Left out of the neoliberal notion of IPRs is the possibility that ‘social profit’ or social welfare can serve as an incentive for innovation, or that government should possess IPRs.

There are many cases where ideas have been generated without monetary gain in mind. In such circumstances, we might consider the idea of public or communal property rights. One example of this type of public property right occurs in the open software programs (sometimes called freeware) that are available on the Internet. The principles behind open software are straightforward: it is shared freely with the public at no charge; users can improve upon it; and users are expected to share the improved software with the public. The only proviso is that no one can exploit the software for commercial gain. From a neoliberal perspective, open software is illogical in so far as it involves a significant investment of ideas for reasons other than monetary gain.

In this connection, it is interesting to note that many prominent 19^th-century  thinkers made a case for the public ownership of ideas. Thomas Jefferson, the first Secretary of State of the USA and the country’s third President, argued that ideas were ‘like air’ and should not be owned by individuals.1 Many of the same 19^th-century economists that advocated free trade also advocated the elimination of patents because they were thought to create a type of monopoly.

Contrary to the view of many neoliberals, we find that the monetary reward conferred by IPRs is not the only motivation behind the pursuit of knowledge and innovation. There are individuals who pursue knowledge for its own sake or for the public good. This point is made forcefully in a recently published open letter on TRIPS that was signed by 13 eminent scientists, all fellows of the Royal Society of Britain. They wrote: ‘Patents are only one means for promoting discovery and invention. Scientific curiosity, coupled with the desire to benefit humanity, has been of far greater importance throughout history’ (Financial Times, 14 February 2001: 20).

Neoliberals fail to acknowledge that in a great many industries private IPRs are not essential to the creation of new knowledge. In many industries, new technology cannot easily be replicated. This means that the innovator has something quite close to a monopoly on the new technology. It was on this basis that economist (and former Austrian finance minister) Joseph Schumpeter elaborated his theory of innovation. He argued that capitalist systems provide incentives for innovation because individuals can reap the rewards of innovation during a period of monopoly. Schumpeter did not envision a need for patents to create a period wherein the inventor holds a monopoly.

There is a case for some type of patent protection in cases where it is easy to replicate an innovator’s technology. The chemical, pharmaceutical and software industries are examples of industries where replication of new technologies can be fairly easy. For this reason, these industries are among the most aggressive defenders of patentee rights. But protection of some patentee rights does not mean that the unequivocal protection that firms demand under the TRIPS agreement is appropriate.

Patents are sometimes of dubious use or legitimacy.

Many critics of the patent system argue that it encourages a ‘winner-takes-all’ mentality that leaves competitors racing for the next big find in some area. In this type of race, there is necessarily a good deal of duplicative effort and investment. This duplication of effort represents a waste of resources. Resources are wasted as well in efforts to sidestep existing patents in lieu of creating genuinely new knowledge. Critics of patents also argue that the patent system is inconsistent with the cumulative, interactive nature of technological progress. On this point, a group of critics observed that the ‘strong protection of a key innovation may preclude the competitors from making socially useful innovation’ (Levin et al. 1987: 788). Finally, critics have questioned the practice of granting all inventions an equal length of protection, and one that lasts as long as 17 to 20 years in most countries.

Today, increasing attention is given to the problem of granting patents to certain inventions that rely upon ideas that are generated in publicly funded research activities. The story of the anti-AIDS drug, AZT, illustrates this problem (Palast 2000). AZT was invented in 1964 by a US researcher who was funded by a grant from the government’s National Institutes of Health (NIH). The UK pharmaceuticals company Glaxo then purchased the drug for use as a medication for pet cats. When the AIDS epidemic emerged, the NIH conducted research that demonstrated the usefulness of AZT on the HIV virus. Over the strenuous objections of the NIH, Glaxo lost no time in applying for a patent on AZT. Today, Glaxo reaps huge profits on AZT sales.

A final concern with patents is that they may now be hindering the advancement of knowledge. As increasingly minute pieces of knowledge become suitable for patent (say, down to the gene level), there is the risk that the pace of scientific progress will be slowed for administrative and financial reasons. The case of what is called golden rice (rice that has betacarotene inserted into it through genetic engineering) illuminates this dilemma. Golden rice has the potential to offer nutritional benefits to millions of people in the world. The two researchers that pioneered golden rice technology reported that they sold it to a transnational corporation (TNC) because of the difficulties involved in negotiating for the estimated 70-105 patents necessary for further development of the rice technology.2

Patents were not important to the development of industrialised countries.

The historical record reveals that industrialised countries did not recognise or enforce patents until after the process of industrialisation was complete. Switzerland introduced a patent law that protected mechanical inventions in 1888, but a comprehensive patent law was introduced only in 1907 (Schiff 1971). The Netherlands first introduced a patent law in 1817, but then abolished it in 1869 because patents were seen to create a monopoly that was inconsistent with the country’s commitment to free trade and free markets (Schiff 1971). Patent law was reintroduced in the Netherlands only in 1912. Interestingly, the 19^th-century economists that were most committed to free trade and free markets rejected patents because of the monopoly argument (Machlup and Penrose 1951).

Other industrialised countries had patent laws by the mid-19^th century. But until well into the 20^th century these laws fell well short of the stringent standards now demanded of developing countries through the TRIPS agreement. For instance, in the 19^th century many countries granted patents to inventions that were imported from abroad, and generally did not check for originality prior to issuing a patent. Japan, Switzerland and Italy did not recognise patents on chemical and pharmaceutical substances (as opposed to the processes of creating them) until the 1970s. Canada and Spain did not recognise these types of patents until the early 1990s. Up until quite recently, India took the same approach to patents on chemical and pharmaceutical substances.

Evidence shows that developing countries have yet to garner any rewards from TRIPS.

There is no reason to expect that TRIPS on their own can spur greater innovation in developing countries. There are many prerequisites for innovation (such as high levels of technical and scientific education) that are not presently met in developing countries. 

There is very little evidence that TRIPS have encouraged technology transfer from industrialised to developing countries. In reality, TRIPS are more likely to reduce technology transfer and innovation. This is because TRIPS make it much more difficult for developing countries to adapt or imitate advanced technologies through reverse engineering or other informal channels of technology transfer (that involve minor modifications to a technology or the development of alternative processes for producing a patented substance). Historically, informal technology transfer has played an important role in developing countries. Unfortunately, the new TRIPS regime largely precludes it.

Finally, there is little evidence that protection of IPRs plays any role in foreign direct investment (FDI) decisions. Indeed, Switzerland’s experience suggests the opposite: the absence of patent laws made the country attractive to foreign investors (Schiff 1971). Much the same has been shown for historical flows of FDI to Canada and Italy (UNDP 1999: 73). Some analysts have also noted that patents are often a substitute (and not a prerequisite) for FDI (Vaitsos 1972).

TRIPS have been costly to developing countries.

First, the most direct cost of TRIPS for developing countries is that large royalty payments must now be paid to corporations in industrialised countries. These royalty obligations compete with a range of existing demands on scarce foreign currency reserves.

Second, TRIPS have increased the power of TNCs vis-a-vis consumers. TRIPS make it more likely that TNCs will be able to engage in monopolistic behaviour, such as monopoly pricing. This is problematic since developing countries often have weak (and sometimes non-existent) anti-trust laws and/or weak enforcement capabilities, particularly in relation to foreign TNCs.

Third, a sophisticated regime of IPR protection requires large outlays of funds and the work of many sophisticated international patent lawyers and other technical advisers. This is especially clear when a country is involved in a TRIPS dispute within the WTO. Developing countries have many more pressing and socially important uses for their scarce resources and personnel.

Fourth, TRIPS have enabled firms in industrialised countries to patent many natural processes and resources that have always been readily available and unpatented in developing countries. This is largely due to the ability of firms in industrialised countries to repackage products and resources (even the most minute, such as micro-organisms and biological processes) that had long been a part of the traditional knowledge system in developing countries. Today, developing countries are in the position of paying foreign firms for the use of substances that had always been produced and available domestically. For instance, a US firm was prevented from acquiring a patent for the medicinal use of the spice turmeric only because the government of India - where such use was known for thousands of years - learned of the attempt and took the company to court.

Fifth and finally, TRIPS hamper certain forms of innovation and technological progress. TRIPS reduce the opportunities for incremental innovation in developing countries.

It is not in the economic interest of developing countries to offer strong protection to IPRs.

IPRs are far less important in the promotion of innovation and technological advancement than neoliberals acknowledge. It is therefore in the economic interest of developing countries to maintain only weak protection of IPRs. Indeed, most developing countries are not at the point where IPRs are critical to the promotion of new technologies in the few industries where IPRs play some role in innovation. At this point, most developing countries are users rather than creators of new technology.

Patents and public interests - an illustration from the AIDS/HIV drug dispute

There has recently been a heated controversy over TRIPS. This concerns the dispute between pharmaceuticals companies in industrialised countries and their counterparts in developing countries (mainly Thailand, Brazil, India and Argentina). The latter sought to export inexpensive AIDS/HIV drugs to other developing countries, especially countries in sub-Saharan Africa.

Pharmaceuticals companies in industrialised countries sell these drugs for over 20 times their cost of production, even when the drugs are being sold to extremely poor countries. A few pharmaceuticals companies decided to offer very poor countries discounts on AIDS/HIV drugs following the public criticisms of their pricing practices. The companies made it abundantly clear that the discounts they offered were motivated by charitable concerns, and not by a change in their stance on IPRs. We know that the latter is true because these same companies were part of a coalition of 41 pharmaceuticals companies that took the South African government to court in March 2001 on the grounds that its patent law grants the government too much power over patentee rights in the interests of public health. The companies claimed that the South African government’s policy of compulsory licensing and parallel imports in the interests of public health are unconstitutional. Fortunately, an effective campaign by advocacy groups and much public outrage forced the pharmaceuticals companies to withdraw their lawsuit in return for a promise from the South African government that it will try to minimise the use of compulsory licensing.

Pharmaceuticals companies argue that they have no greater obligation to serve the public interest by providing subsidised medicine than food companies have to curb malnutrition by providing subsidised food (Pilling 2001). This argument is not compelling since the industry derives a large part of its profit from socially sanctioned monopolies (i.e. patents), on which the food industry does not rely to any comparable extent. Moreover, much research in the pharmaceuticals industry is actually financed by the public sector or private charities. Thus the industry has special obligations to the public that make it far different from other types of industry.

To conclude: excessive attention to patentee rights at the cost of broader human rights and public health leads to perverse outcomes. There are compelling reasons to dilute patentee rights in cases of public health crises. Governments in industrialised countries have disregarded patents in the name of public interest. Notably, the Canadian government overrode the patent of the Bayer Corporation on the medication Cipro during the anthrax scare in fall 2001. The threat of similar action by the US government enabled it to obtain a 50% discount on the same medication.

Policy alternatives

There are few economic benefits associated with enhanced protection of IPRs in developing countries.

Developing countries have an interest in the weak protection of IPRs. Alternative policy towards IPRs can take two paths: the spaces in the existing IPR regime can be exploited, and the regime itself can be challenged.

Education and government support for targeted, applied research are much more important to the promotion of innovation in developing countries than is the protection of IPRs.

Far more important than the protection of IPRs is the promotion of innovation and technological progress in developing countries through other means. Efforts to promote innovation should be tightly linked to the goals of industrial policy. These objectives can be addressed through government support for education and other initiatives that might stimulate targeted types of research. Moreover, some reallocation of existing educational expenditures can free substantial resources for such initiatives. The government might also support some types of advanced education (even education abroad) in exchange for a period of public service.3 The government might forgive a portion of any educational loan in exchange for a period of public service.

Governments can use FDI as a strategic means to promote technology and knowledge transfers and to stimulate innovation by domestic researchers.

A strategic policy towards FDI can also promote technology transfer and innovation by domestic researchers. FDI can be a means of transferring technology if the government targets the attraction of some types of investment and structures operating agreements with this goal in mind. It is also possible to conceive of using FDI strategically to create partnerships between researchers in developing and industrialised countries. Indeed, some governments might negotiate research partnerships in FDI agreements. They might also negotiate research internships for some of their nationals in the corporation’s research headquarters. This type of strategy might be especially useful for those countries that have a scant pool of well-trained researchers.

Governments in developing countries should promote patents only in the few industries where they can be important in the generation of new knowledge.

As we have seen, patents can play a role in stimulating innovation in a few industries - namely, pharmaceuticals, chemicals and software. In these limited cases, governments may wish to pursue one of two strategies, depending on existing domestic research and development (R&D) capabilities.

In countries with some existing R&D capabilities, the government can provide financial and administrative assistance to firms and university-based researchers that seek to patent their work. This assistance might be tied to the pursuit of research that contributes in some specific way to the attainment of industrial policy goals. The government might then share patent proceeds with the researchers that they fund. The government could also serve as a clearing house for some types of research. It might bring researchers together for strategic purposes or publicise potential applications of research that have not been patented.

In countries where existing R&D capabilities are minimal to non-existent, the government can organise and finance outside researchers to identify those aspects of traditional knowledge and local resources that can be patented. National or regional governments, local community organisations or government-private sector partners could hold patents developed through this approach.

Governments in developing countries can use clauses within the existing TRIPS agreement to override some patents.

The success of developing countries in securing concessions on AIDS/HIV drugs (see above) suggests that this strategy can be used in the cases of other TRIPS. Foreign companies may grant other exceptions to TRIPS for reasons of public relations if developing countries press the case. It is worth pressing the clauses that speak to the public interest within the existing TRIPS agreement. Developing countries might pursue their challenges to TRIPS collectively in order to maximise their leverage and share the costs of advancing a case.

The existing TRIPS agreement provides for a grace period during which time developing countries are to move towards adoption of the IPR protections that prevail in industrialised countries. This grace period has expired for most developing countries, and will expire for the poorest of these in 2005. It is heartening that in the aftermath of the dispute over AIDS/HIV drugs, many supporters of TRIPS have suggested that the grace period be extended. It is critical that developing countries press forward on the matter of obtaining substantially longer and flexible grace periods for TRIPS.

The TRIPS regime should be challenged.

Finally, it is time to press for reconsideration of the entire TRIPS regime. The dilution of TRIPS and the expansion of the conditions under which exemptions are granted are particularly worthwhile directions for a new approach to TRIPS. Collective action on recasting the TRIPS regime is more than warranted at this time.u

Dr Ha-Joon Chang is Assistant Director of Development Studies in the Faculty of Economics and Politics, University of Cambridge. Dr Ilene Grabel is Associate Professor and Co-Director of the graduate programme in Global Finance, Trade and Economic Integration at the University of Denver’s Graduate School of International Studies. The above is extracted with permission from their new book Reclaiming Development: An Alternative Economic Policy Manual (London and New York: Zed Books, 2004). For information on ordering the book, please refer to the advertisement on p.67.

Notes

1    Unfortunately, he did not believe that people were also like air as he owned slaves.

2    Some analysts of the golden rice story dispute the patent figure (RAFI 2000).

3    Enforcement is critical since many countries have these types of programme, but have not pressed recipients to honour their obligations to the country upon the completion of their education.

References

Financial Times (2001). ‘Strong global patent rules increase the cost of medicines’, 14 February: 20.

Levin, R., A. Klevorick, R. Nelson and S. Winter (1987). ‘Appropriating the returns from industrial research and development’, Brookings Papers on Economic Activity, No. 3.

Machlup, F. and E. Penrose (1951). ‘The patent controversy in the nineteenth century’, Journal of Economic History, 10 (1).

National Law Centre for Inter-American Free Trade (1997). ‘Strong intellectual property protection benefits the developing countries’, www.natlaw.com/pubs/spmxipll.htm.

Palast, G. (2000). ‘Keep taking our tablets (no one else’s)’, Observer, 23 July, Business Section, 7.

Pilling, D. (2001). ‘Patents and patients’, Financial Times, 17-18 February.

RAFI (Rural Advancement Foundation International) (2000). RAFI Communique 66, September/October.

Schiff, E. (1971). Industrialisation without National Patents: The Netherlands, 1869-1912 and Switzerland, 1850-1907, Princeton: Princeton University Press.

UNDP (United Nations Development Programme) (1999). Human Development Report 1999, Oxford: Oxford University Press.

Vaitsos, C. (1972). ‘Patents revisited: Their function in developing countries’, Journal of Development Studies, 9 (1).