Enhancing Incentives forKnowledge Generation and Diffusion to

Address the Problems of the Poor: Innovative Financing Options

Pedro ConceiçãoPedro Conceição

Steps

1.1. Context: The Global Knowledge DivideContext: The Global Knowledge Divide

2.2. The Case of HealthThe Case of Health

3.3. Innovative Financing OptionsInnovative Financing Options

4.4. Discussion: What is needed and what is Discussion: What is needed and what is feasible?feasible?

1. The Global Knowledge Divide

Evidence on the Knowledge Divide I: Share of World Patents and Income

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Rest of the World

Top 10 Countries

Evidence on the Knowledge Divide II: Patents and Income per Capita

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Evidence on the Knowledge Divide III: Scientific Production

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The Sachs’ View of the World Group 1: The InnovatorsGroup 1: The Innovators

1 billion people (most OECD)1 billion people (most OECD) Described by endogenous growth modelsDescribed by endogenous growth models

Group 2: The DiffusersGroup 2: The Diffusers 3.5 billion people (China, India, Southern Cone of 3.5 billion people (China, India, Southern Cone of

South America, Eastern European EU members)South America, Eastern European EU members) Absorb technology by i) buying capital goods, ii) Absorb technology by i) buying capital goods, ii)

FDI, iii) final consumption of consumer goodsFDI, iii) final consumption of consumer goods

Group 3: The (Income and Knowledge) PoorGroup 3: The (Income and Knowledge) Poor 1.5 billion people (Sub-saharan Africa, Andean 1.5 billion people (Sub-saharan Africa, Andean

region, Central and South Asia)region, Central and South Asia) Almost absolutely excludedAlmost absolutely excluded

Why is there a Knowledge Divide? I Knowledge production requires a mix of Knowledge production requires a mix of

public and private incentives for knowledge public and private incentives for knowledge generationgeneration Public supportPublic support IPRsIPRs

The mix is important because there is a need The mix is important because there is a need to balance between dynamic efficiency and to balance between dynamic efficiency and static efficiency static efficiency

Both private and public actors play roles as Both private and public actors play roles as suppliers and consumers of science, suppliers and consumers of science, technology and innovation in national and technology and innovation in national and regional systems of innovationregional systems of innovation

Why is there a Knowledge Divide? II Current Incentives and Capacity are Insufficient Current Incentives and Capacity are Insufficient

to Produce Knowledge Required by the Poorto Produce Knowledge Required by the Poor Limited effectiveness of private incentives (small Limited effectiveness of private incentives (small

and “thin” markets)and “thin” markets) Limited resources devoted, in a sustained way, by Limited resources devoted, in a sustained way, by

the poor to research and to technological innovationthe poor to research and to technological innovation (failure of public incentives) (failure of public incentives)

Limited contribution of other countries’ research to Limited contribution of other countries’ research to address problems specific to the pooraddress problems specific to the poor

Limited access by the poor to knowledge produced Limited access by the poor to knowledge produced in developed countriesin developed countries

The result: a highly skewed supply and The result: a highly skewed supply and diffusion of innovations that leaves the poor outdiffusion of innovations that leaves the poor out

What has the Response Been Like?

Since there is no “global government,” little Since there is no “global government,” little public support to global issues and virtually public support to global issues and virtually none to support the development of knowledge none to support the development of knowledge relevant exclusively to the poorrelevant exclusively to the poor

The The globalglobal response so far has been mostly response so far has been mostly centered on private incentives to enhance centered on private incentives to enhance dynamic efficiency (e.g. extending intellectual dynamic efficiency (e.g. extending intellectual property rights through TRIPS)property rights through TRIPS)

What has been the rationale?

The rehtoric and some of the practice of The rehtoric and some of the practice of swinging the pendulum from public support to swinging the pendulum from public support to private incentivesprivate incentives

The national interests of rich countries in The national interests of rich countries in trade negotiations (the political economy of trade negotiations (the political economy of international IPRs)international IPRs)

The argument that the science and The argument that the science and technology are “luxuries” and that the poor technology are “luxuries” and that the poor have more pressing issues to deal withhave more pressing issues to deal with

What is Wrong with the Current Response? Inconsistent with national practice in most Inconsistent with national practice in most

developed countries, and especially the US, developed countries, and especially the US, which have devoted over long periods of time which have devoted over long periods of time substantial public resources to R&Dsubstantial public resources to R&D

Lack of theoretical and empirical support to the Lack of theoretical and empirical support to the assertion that international IP harmonization is assertion that international IP harmonization is the best response to avoiding free-riding and the best response to avoiding free-riding and promoting local innovationpromoting local innovation

Science, technology and innovation have Science, technology and innovation have proved key in solving both larger and smaller proved key in solving both larger and smaller development challenges:development challenges: Green RevolutionGreen Revolution Ochocersiasis ControlOchocersiasis Control Drancunculiasis Control (close to eradication)Drancunculiasis Control (close to eradication)

2. The Case of Health

Why Health? I

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Western Pacif ic Americas Europe Southeast Asia EasternMediterranean

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Communicable diseases

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Malaria: more than 1 million deathsMalaria: more than 1 million deaths TB: close to 2 million deathsTB: close to 2 million deaths HIV/AIDS: more than 3 million deathsHIV/AIDS: more than 3 million deaths 1.4 million deaths per year in poor countries from 1.4 million deaths per year in poor countries from

childhood diseases readily combated by immunization, childhood diseases readily combated by immunization, compared with fewer than 1,000 in developed countriescompared with fewer than 1,000 in developed countries

Why Health? II

Malaria: cuts output in sub-Saharan Africa by Malaria: cuts output in sub-Saharan Africa by 17%17%

TB: costs about 20% of household income and TB: costs about 20% of household income and cuts output in sub-Saharan Africa by 4%-7%cuts output in sub-Saharan Africa by 4%-7%

HIV/AIDS: cuts output in sub-Saharan Africa HIV/AIDS: cuts output in sub-Saharan Africa by 35%by 35%

Each less ten years of life expectancy costs Each less ten years of life expectancy costs (after controlling for other factors) 0.3 to 0.4 % (after controlling for other factors) 0.3 to 0.4 % a year in terms of economic growth: a year in terms of economic growth:

Comparing the average life expectancy of a rich Comparing the average life expectancy of a rich with that of a poor country (77 years vs. 49 years) with that of a poor country (77 years vs. 49 years) the gap in the yearly growth rate is of 1.6%the gap in the yearly growth rate is of 1.6% (CMH (CMH 2001: 24) 2001: 24)

Why Health? III

Success is possible:Success is possible: Smallpox eradication ($168 billion in benefits from Smallpox eradication ($168 billion in benefits from

1978 to 1998, and counting)1978 to 1998, and counting) Polio almost eradicated (savings of $1.5 billion a Polio almost eradicated (savings of $1.5 billion a

year)year)

Science, technology and innovation do matter:Science, technology and innovation do matter: One of the most R&D intensive sectors, where One of the most R&D intensive sectors, where

incentives for knowledge generation and diffusion incentives for knowledge generation and diffusion are keyare key

Knowledge on health conditions has been Knowledge on health conditions has been responsible for major improvements in well-being responsible for major improvements in well-being over the 20th centuryover the 20th century

Why Health? IV Gross asymetries in knowledge generation:Gross asymetries in knowledge generation:

$70 billion a year on health R&D by the public and $70 billion a year on health R&D by the public and private sectors, but only 10% is used for research private sectors, but only 10% is used for research into 90% of the world's problems (“10/90 gap”)into 90% of the world's problems (“10/90 gap”)

of 1 393 new chemical entities marketed between of 1 393 new chemical entities marketed between 1975 and 1999, only 16 were for tropical diseases 1975 and 1999, only 16 were for tropical diseases and tuberculosis. There is a 13-fold greater chance and tuberculosis. There is a 13-fold greater chance of a drug being brought to market for central-of a drug being brought to market for central-nervous-system disorders or cancer than for a nervous-system disorders or cancer than for a neglected disease.neglected disease.

Highly contentious issue of access by the poor Highly contentious issue of access by the poor to IP protected drugsto IP protected drugs

Deeply suspicious pharmaceutical sector to Deeply suspicious pharmaceutical sector to producing drugs and vaccines for the poorproducing drugs and vaccines for the poor

The Issues

Knowledge ApplicableOnly In Poor Countries

Knowledge Applicable BothIn Poor And Other Countries

Knowledge Doesnot Exist

KnowledgeExists

• Malaria control

• Malaria vaccine• TB vaccine (effective)• HIV/AIDS vaccine (?)

• Childhood vaccines• ARVs

• Cancer treatment• HIV/AIDS vaccine (?)

The Challenges

Knowledge ApplicableOnly In Poor Countries

Knowledge Applicable BothIn Poor And Other Countries

Knowledge Doesnot Exist

KnowledgeExists

• “Demand” challenges

• No incentives• No capacity

• IP-driven prices• “Demand” challenges

• Scientific andTechnical• IP-driven prices• “Demand” challenges

3. Innovative Financing Options

Knowledge Relevant for Both IP-Priced Challenges: Thrust of Options is IP-Priced Challenges: Thrust of Options is

Segmentation and DifferentiationSegmentation and Differentiation Knowledge Exists: Knowledge Exists: differential pricingdifferential pricing, which , which

enhances static efficiency without detracting, in enhances static efficiency without detracting, in the leastest, dynamic efficiencythe leastest, dynamic efficiency

Knowledge does not Exist: Knowledge does not Exist: differential patentingdifferential patenting (Lanjouw proposal), allowing for IP protection for (Lanjouw proposal), allowing for IP protection for either the poor or the other countries, not both, either the poor or the other countries, not both, through a foreign filing licensethrough a foreign filing license

Problems:Problems: Ensuring segmentationEnsuring segmentation Political acceptance of segmentation by those not poorPolitical acceptance of segmentation by those not poor

Demand Challenges: Create Reliable and Demand Challenges: Create Reliable and Stable DemandStable Demand GAVI, Global Fund to Fight AIDS, TB and MalariaGAVI, Global Fund to Fight AIDS, TB and Malaria ““Clinton deal”Clinton deal”

Knowledge Relevant for the Poor Only Knowledge Exists, then mostly Demand Knowledge Exists, then mostly Demand

Challenges: Reliable and Stable DemandChallenges: Reliable and Stable Demand GAVI, Global Fund to Fight AIDS, TB and MalariaGAVI, Global Fund to Fight AIDS, TB and Malaria Global TB Drug FacilityGlobal TB Drug Facility

Knowledge does not Exist:Knowledge does not Exist: PrizesPrizes

Research contestsResearch contests Patent buyoutsPatent buyouts Purchase commitmentsPurchase commitments

Tax creditsTax credits on R&D directed to the conditions of the pooron R&D directed to the conditions of the poor on sales of pharmaceuticals for the pooron sales of pharmaceuticals for the poor

Extending “Orphan Drug Legislation”Extending “Orphan Drug Legislation” Patent extensions on existing pharmaceuticalsPatent extensions on existing pharmaceuticals

Direct funding to R&DDirect funding to R&D

Prizes General Characteristics:General Characteristics:

Sponsor pays an award to the innovatorSponsor pays an award to the innovator Sponsor only has to pay if there is innovationSponsor only has to pay if there is innovation Sponsor defines how the innovation is usedSponsor defines how the innovation is used E.g.: sterilization, canned food, measurement of E.g.: sterilization, canned food, measurement of

longitude, aviation, sciencelongitude, aviation, science

Variants:Variants: Sponsor specifies objective (e.g. X prize);Sponsor specifies objective (e.g. X prize); Sponsor organizes research contest (e.g. US DOD);Sponsor organizes research contest (e.g. US DOD); Patent buy-outs (sponsor pays ex-post);Patent buy-outs (sponsor pays ex-post);

Purchase commitments for vaccines of the poor Purchase commitments for vaccines of the poor (Kremer):(Kremer): Encourages innovation Encourages innovation andand diffusion diffusion

Tax Credits On R&D:On R&D:

Pharmaceutical companies can get credits for R&D Pharmaceutical companies can get credits for R&D on conditions of the poor;on conditions of the poor;

Difficult to monitor, no guarantee of innovation;Difficult to monitor, no guarantee of innovation;

On Sales:On Sales: Pharmaceutical companies can get credits for sales Pharmaceutical companies can get credits for sales

of pharmaceutical products to the poorof pharmaceutical products to the poor Stronger innovation incentive;Stronger innovation incentive; Also an incentive for diffusion;Also an incentive for diffusion;

Examples include the Kerry-Frist proposal in the Examples include the Kerry-Frist proposal in the US Senate and the Gordon Brown suggestionUS Senate and the Gordon Brown suggestion

Orphan Drug Legislation It exists nationally: “Orphan diseases” in the US, It exists nationally: “Orphan diseases” in the US,

EU and Japan get special incentives:EU and Japan get special incentives: In the US, up to 7 years of market exclusivity;In the US, up to 7 years of market exclusivity; Grants for R&D and clinical trials;Grants for R&D and clinical trials; Accelerated review in clinical trials;Accelerated review in clinical trials; Special tax treatment of sales;Special tax treatment of sales;

Patent or Market Exclusivity Roaming:Patent or Market Exclusivity Roaming: Patent extensions on existing pharmaceuticals;Patent extensions on existing pharmaceuticals; Market exclusivity;Market exclusivity; Exists for pediatric pharmaceuticals in the US;Exists for pediatric pharmaceuticals in the US;

Extend “orphan status” to the international level, Extend “orphan status” to the international level, and consider especially the possibility of patent and consider especially the possibility of patent or exclusivity roamingor exclusivity roaming

Direct Funding to R&D Mostly through Public/Private Partnerships:Mostly through Public/Private Partnerships:

Medicines for Malaria Venture;Medicines for Malaria Venture; Global Alliance for TB Drug Development;Global Alliance for TB Drug Development; International AIDS Vaccine Initiative (IAVI);International AIDS Vaccine Initiative (IAVI); Drugs for Neglected Diseases Initiative (DNDi);Drugs for Neglected Diseases Initiative (DNDi);

Gates Foundation “Grand Challenges on Global Gates Foundation “Grand Challenges on Global Health”Health”

Proposals to create a Global Health R&D FundProposals to create a Global Health R&D Fund Proposals to create a Manhattan Project for the Proposals to create a Manhattan Project for the

development of a HIV/AIDS vaccinedevelopment of a HIV/AIDS vaccine

4. Discussion: What is Needed and What is Feasible?

Points to reflect upon What can be generalized beyond health? E.g., agricultural What can be generalized beyond health? E.g., agricultural

R&D, where prizes have also been proposed? Other?R&D, where prizes have also been proposed? Other? Is there one “silver bullet”? Would many proposals entail Is there one “silver bullet”? Would many proposals entail

dispersion and waist? What criteria would tell us what the dispersion and waist? What criteria would tell us what the best options are?best options are?

Or should we invest in enriching the institutional ecology of Or should we invest in enriching the institutional ecology of incentives with many different initiatives?incentives with many different initiatives?

Isn’t the linear model of innovation behind much of Isn’t the linear model of innovation behind much of reasoning providing rationales for the specific financing reasoning providing rationales for the specific financing options?options?

What steps to take in order to consider a “global system of What steps to take in order to consider a “global system of innovation” that does not leave the poor out?innovation” that does not leave the poor out?

How far should we extend our imagination in designing How far should we extend our imagination in designing new incentives and institutions (e.g. open source/access new incentives and institutions (e.g. open source/access models; international R&D treaties; liability rules).models; international R&D treaties; liability rules).

Are we forgetting science?Are we forgetting science?