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UniversityofSydneyFacultyofEconomicsandBusinessSchoolofPoliticalEconomy

TheWTOsTRIPSAgreementandits

ImplicationsforAccesstoEssentialMedicines

DavidJ.A.Taylor

ThisThesisissubmittedinpartialfulfillmentoftherequirementsforthedegreeof:

MasterofEconomics(SocialSciences)(Honours)

3rdNovember2008

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SubmissionPurpose

ThisthesisissubmittedinpartialfulfillmentoftherequirementsforthedegreeofMasterofEconomics(SocialSciences)withHonours,(CourseCode:FC036).IncorporatingUnitsofCredit:ECOP6025(DissertationProposal),ECOP6026

(Dissertation:PartA)andECOP6027(DissertationPartB).IcertifythatthethesisIampresentingforexaminationforthisdegreeissolelymyownworkotherthanwhereIhaveclearlyindicatedthatitistheworkofothers,inwhichcasetheextentofanyworkcarriedoutjointlybymeandanyotherpersonisclearlyidentifiedinit.Iconsidertheworktobeacompletethesisfitforexamination.

PlagiarismComplianceStatementIcertifythat:

IhavereadandunderstoodtheUniversityofSydneyStudentPlagiarism:CourseworkPolicyandProcedure;

IunderstandthatfailuretocomplywiththeStudentPlagiarism:CourseworkPolicyandProcedurecanleadtotheUniversitycommencingproceedingsagainstmeforpotentialstudentmisconductunderChapter8oftheUniversityofSydney

By-Law1999(asamended);Thisworkissubstantiallymyown,andtotheextentthatanypartofthisworkisnotmyownIhaveindicatedthatitisnotmyownbyacknowledgingthesourceofthatpartorthosepartsofthework.

Name:DavidJ.A.Taylor

Signature1: Date:3rdNovember2008

1Onmyhonourasastudent,Ihaveneithergivennorreceivedanyaidonthisthesis

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Ifnaturehasmadeanyonethinglesssusceptiblethanallothersofexclusiveproperty,itistheactionofthethinkingpowercalledanidea,whichanindividualmayexclusivelypossessaslongashekeepsittohimself;butthemomentitisdivulged,itforcesitselfintothepossessionofeveryoneHewhoreceivesanideafromme,receivesinstructionshimselfwithoutlesseningmine;ashewholightshistaperatmine,receiveslightwithoutdarkeningme.Thatideasshouldfreelyspreadfromonetoanotherovertheglobe,forthemoralandmutualinstructionofman,andimprovementofhiscondition,seemstohavebeenpeculiarlyandbenevolentlydesignedbynatureincapableofconfinementorexclusiveappropriation.

- ThomasJefferson(1813)2AuthoroftheDeclarationofAmericanIndependence,OftheStatuteofVirginiaforReligiousFreedom,

FatheroftheUniversityofVirginia

[Whoownsthepatentonthisvaccine?]

Well,thepeople,Iwouldsay.Thereisnopatent.Couldyoupatentthesun?

- JonasSalk(12thApril1955)3Medicalresearcherandauthor,InventoroftheSalkvaccineagainstPolio,FounderoftheSalkInstituteforBiologicalStudies

SinceIstartedtreatment,Iamnolongersick.Icanworkandamhappy.Before,Iwasverysick,andnowIamfine.

- Violet4

HIV+shopkeeperfromKampala,Uganda

RecipientofART

2Source:Peterson(1970).3Source:Hewitt,MurrowandFriendly(1955).4Source:Mayne(2004).

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Contents Page Acknowledgements 9 ListofAbbreviationsUsed 10 ListofTables 12

ListofFigures 12 Chapter1: Introduction:PublicHealth,IntellectualProperty

RightsandAccesstoEssentialMedicines14

TheWorldTradeOrganization 14

TheTRIPSAgreement 15

Context 15

FrameworkforAnalysis 16

Chapter2: IntellectualPropertyRights,TradeandTechnologyTransfer 20

OriginsofIntellectualPropertyRights 20 PrivateversusPublicgood 21

TheInternationalisationofIntellectualProperty 22

ExportersversusImporters 23

Aneconomicrationale 24

TheEconomicsofIntellectualPropertyRightsandTrade 25 Development&Trade 26

TheoreticalEvidence 26

EmpiricalEvidence 27 TechnologyTransfer,Trade&IntellectualPropertyRights 28 TechnologyTransfer 28

Trade,GrowthandTechnologyTransfer:Theory 29

KnowledgeSpillovers 30

TechnologyTransfer&IntellectualPropertyRights 32

Conclusion 33 Chapter3: ImplicationsforTradeandTechnologyTransferunder

TRIPS36

TradeLiberalisationandTRIPS 37 TRIPSasaDevelopmentIssue 38

SocialandEconomicWelfare 39 IrrationalExuberance 39

WelfareCosts 40

TechnologyTransferandInnovation 41 AbsoluteandOpportunityCosts 42 AdministrativeCosts 42

RentTransfers 44

TraditionalKnowledge 47

Conclusion 49

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Chapter4: PublicHealthPriorities&BarrierstoAccess 50 Health,Development&Poverty 50 Healthasapriority 50

HealthandEconomicGrowth 51

Theviciouscycleofpoverty 52 TheEpidemiologicalTransition 53

TheGlobalBurdenofDisease 54

TheChallengeofCommunicableDisease 54 Tuberculosis 56

Malaria 56

NeglectedDiseases 57

TheHIV/AIDSEpidemic 58 DiseasePathophysiology 59

Transmission 59

AGlobalHealthCrisis 60

EpidemiologicalTrends 61

TheImplicationsofHIV/AIDSforDevelopmentandEconomicGrowth

62

PreventionandTreatment 64

TheImportanceofAntiretroviraltreatment 65

TheroleofHealthSystems 67 BarrierstoTreatment 67 Conclusion 69 Chapter5: IntellectualPropertyRights,PublicHealth&Accessto

EssentialMedicines

70

Pricing 71 TheRoleofGenerics 71

TheImpactofPatentProtection 72

PatentsandPrice:EmpiricalData 75

GenericCompetition 75

Analternateposition 76

Limitationsofavailabledata 77

PatentProtectioninItaly 79

ImplicationsforIndia 80

PriceControls 81 Affordability 81 InsuranceCoverage 82

Availability 84 Demandfactors 85

Supplyfactors 86

DrugDevelopmentCosts 87

TRIPSandAvailability 88

Conclusion 89

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Chapter6:

Safeguards&PolicyOptionsundertheTRIPSParadigm

90

PolicyOptionsforDevelopingNations 91 TheDohaDeclaration 91

CompulsoryLicenses 92 ParallelImportation 93

EmpiricalEvidence 94 ExperiencefromBrazil 94

ExperiencefromThailand 96

ImplicationsforAccess 98

PolicyOptionsforDevelopedNations 98 PriceDiscrimination 98

ImplicationsforParallelImporting 101

TheAsymmetricInformationProblem 102

FuturePolicyChallenges 103

Conclusion 104 Chapter7: Conclusion:TRIPSanditsImplicationsforAccessto

EssentialMedicines106

Appendix AppendixA:Figures 110 AppendixB:Tables 113

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Acknowledgements

Thisthesisconstitutesthepinnacleofthebetterpartofsixyearsofcontinuousstudy.Ineedtothankseveralpeoplefortheirinsights,supportandencouragementalongtheway.

Firstly,Dr.EmilyBlanchardattheUniversityofVirginiafuelledmyinterestinthefieldofinternationaleconomics.Dr.JohnHallattheSchoolofPublicHealthwelcomedmeintotheworldofPublicHealthandhasbeenareliablesourceofadvice.ProfessorGlennSalkeldprovideduniqueinsightsanddirectionintoanalysingaccesstopharmaceuticals.

Forthisthesis,IwouldliketoacknowledgeTimAndersonforsupervisingthisproject.

Ioweadebtofgratitudetomyfriendsandfamilyfortheirconstantencouragementandsupport.Especiallytomybrother,AndrewforfixingallthingsITrelatedandmyparentsRussellandLindaforcontinuouslyvolunteeringtoreadmyworkandcorrectmygrammar,evenfromtheothersideoftheworld!

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ListofAbbreviationsUsed

3TC LamivudineAC AverageCostAFL-CIO AmericanFederationofLabor&CongressofIndustrial

OrganizationsAIDS AcquiredImmunodeficiencySyndromeART AntiretroviralTherapyARV AntiretroviralCD4 ClusterofDifferentiation4CPTECH TheConsumerProjectonTechnologyCVD CardiovascularDiseaseD4T StavudineDALY DisabilityAdjustedLifeYearDDT DichloroDiphenylTrichloroethaneDSB DisputeSettlementBody(WTO)EU EuropeanUnionFDI ForeignDirectInvestmentG7 Groupof7IndustrialisedNationsGATS GeneralAgreementonTradeinServicesGATT GeneralAgreementonTariffsandTradeGBD GlobalBurdenofDiseaseProjectGDP GrossDomesticProductGNP GrossNationalProductHAART HighlyActiveAntiretroviralTherapyHAI HealthActionInternational

HIC HighlyIndustrialisedCountryHIV HumanImmunodeficiencyVirusHIV+ HIVpositive(PLWHA)HR HumanResourcesICFTU InternationalConfederationofFreeTradeUnionsIDU InjectingDrugUserILO InternationalLabourOrganizationIMF InternationalMonetaryFundIP IntellectualPropertyIPL IndustrialPropertyLaw(Brazil)IPR IntellectualPropertyRightJV JointVentureLDC LeastDevelopedCountryMC MarginalCostMDR-TB Multi-DrugResistantTuberculosis(TB)MFN MostFavouredNationMNC MultinationalCompanyMR MarginalRevenueMSF MdecinsSansFrontiresMSM MenwhohaveSexwithMenMTCT Mother-to-childTransmission(Verticaltransmission)

NCE NewChemicalEntityNGO Non-GovernmentalOrganisation

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NHS NationalHealthService(UK)NIH NationalInstitutesofHealth(U.S.)nNRTI Non-nucleosidereversetranscriptaseinhibitorsNVP NevirapineNRTI Nucleoside&Nucleotidereversetranscriptaseinhibitors

OECD OrganisationforEconomicCo-operationandDevelopmentODA OverseasDevelopmentAssistanceOLI Ownership,Location,InternalisationPBS PharmaceuticalBenefitsScheme(Australia)PEPFAR PresidentsEmergencyPlanforAIDSReliefPHC PrimaryHealthCarePHI PrivateHealthInsurancePhRMA PharmaceuticalResearchandManufacturersofAmericaPI ProteaseInhibiterPLWHA PeopleLivingwithHIV/AIDSPMASA PharmaceuticalManufacturersAssociationofSouthAfricaPMTCT Preventionofmother-to-childtransmission(MTCT)PPP PublicPrivatePartnershipRNA RibonucleicAcidR&D ResearchandDevelopmentSEC UnitedStatesSecuritiesandExchangeCommissionSIV SimianImmunodeficiencyVirusSW SexWorkerTAC TreatmentActionCommittee(SouthAfrica)TB TuberculosisTDF TenofovirDisoproxilFumarate

TRIPS Trade-RelatedIntellectualPropertyRightsUK UnitedKingdomUN UnitedNationsUNAIDS UnitedNationsJointProgrammeonHIV/AIDSUNCTAD UnitedNationsConferenceonTradeandDevelopmentUNEP UnitedNationsEnvironmentProgrammeUSAID UnitedStatesAgencyforInternationalDevelopmentUSCBO UnitedStatesCongressionalBudgetOfficeUSFDA UnitedStatesFoodandDrugAdministrationUSITC UnitedStatesInternationalTradeCommissionUSPTO UnitedStatesPatentandTrademarkOfficeUSTR UnitedStatesTradeRepresentativeVCCT VoluntaryConfidentialCounselingandTestingWIPO WorldIntellectualPropertyOrganizationWHO WorldHealthOrganizationWTO WorldTradeOrganizationXDR-TB ExtensivelyDrugResistantTuberculosis(TB)

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ListofTables# Title Page 3.1 CostsofImplementingTRIPSprovisionsinselectedcountries 43

3.2 NationswithadeficitbetweenadditionalpatentrentsandFDIaccruedthroughTRIPSimplementation

47

4.1 LeadingCausesofMortality&MorbiditybyIncomeClassificationin2001

55

4.2 LeadingCausesofMorbiditybyIncomeClassificationin2001 55A3.1 ProjectedannualwelfaregainsfromtheUruguayRound 113A3.2 ChangeinpatentrentsandFDIflowsinaseriesofcountries

resultingfromimplementationofTRIPSprovisions114

A4.1 WorldBankCountry/TerritoryIncomeClassificationsUsedintheGBDstudy

115

A4.2 LeadingCausesofMortalityinAdults(15-59)byIncome

Classificationin2001

116

A4.3 LeadingCausesofMortalityinChildren(0-14)byIncomeClassificationin2001

116

ListofFigures

# Title Page 3.1 Percentageofpatentsissuedtoresidentsinsampleof6countries

(1985-2006)45

3.2 ProjectedchangeinstaticpatentrentsfromimplementationoftheTRIPSagreementfor21selectedcountries

45

3.3 ProjectedchangeinstaticflowsofU.S.-basedFDIfromimplementationoftheTRIPSagreementfor24selectedcountries

46

4.1 TheRelationshipbetweenHealth&Poverty 534.2 TheEpidemiologicalTransitionModel 544.3 LifeExpectancyTrendsbetween1950-2010forthefournations

withthehighestHIVprevalence(asof2008)59

4.4 GlobalSummaryofHIVtransmissionmethods 614.5 AverageSurvivalRateforHIV-1infectedindividualsindeveloping

nationswithoutaccesstoART67

4.6 HealthSystemComponents 685.1 WelfareLossfromPatentProtectionforDrugX 72

5.2 LowestAvailablePriceof1st-LineTripleCombinationART2000-2007

76

5.3 ShareofGlobalPharmaceuticalSalesbyCountryIncomeClassification

84

5.4 TheDevelopmentProcessofanewDrug(Industrymodel) 876.1 PharmaceuticalPriceDiscriminationBetweenHighandLowIncome

Markets100

A4.1 Relationshipbetweeneconomicdevelopment(measuredbypercapitaGDP)andlifeexpectancyin2008

110

A4.2 ProjectionofHIV/AIDSAttributableMortalityto2030byCountryIncomeClassification

111

A4.3 ProjectionofHIV/AIDSAttributableMorbidityto2030byCountryIncomeClassification

112

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Introduction:PublicHealth,IntellectualPropertyRightsandAccesstoEssentialMedicines

Themarchofeconomicglobalisationhasledtosignificantincreasesinglobal

tradeflows,investmentanddevelopment.Thelatterpartofthe20thcentury

oversawaneraofunprecedentedglobalgrowth,whichmanyhaveattributedto

theliberalisationoftradebarriers.Globalisationsadvocatesendorsethe

advantagesfromthisneweraoftogethernessbyarguingthatithasbought

prosperitytodevelopingnations,whilesimultaneouslyreformingmoribundmarketsandinstitutionsintheindustrialisedwest5.Ineconomictheory,thisis

possible.Inpractice,ratherthanresultinginanequalbenefitsforall,ithas

becomeclearthatthegainsfromglobalisationarenotbeingevenlydistributed.

Criticshaveusedthisasapretexttoattacktheliberalisationagendaandhave

proclaimedthecaptureofglobalisationbyspecialinterestgroups6.Theresulting

argumenthashighlightedtheroleofanumberofinstitutionsindistortingthe

benefitsofthisglobalconvergence.

TheWorldTradeOrganization

Theinstitutionthatmanyviewasthefaceofglobalisation,theWorldTrade

Organization(WTO),hasbeenviewedbysomeofharbouringaperceivedbias

towardtheinterestsofindustrialisednations.Itssupportersholdupthe

institutionasabastionofliberalisationandfreetrade.Itscriticscontendthat

althoughthebenefitsfromtradeliberalisationmaybearesubstantial,theyare

notbeingsharedequallybetweenhighandlow-incomenations.Oneaspectof

theorganisationhascomeundersignificantcriticism,namelyitsbinding

togetheroftradeandintellectualpropertyrights(IPRs)undertheAgreementon

Trade-RelatedAspectsofIntellectualPropertyRights(TRIPS).

5Foranexamplesee:Friedman(1999;2005).6Foranexamplesee:Klein(2002b;2002a;2008).

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TheTRIPSAgreement

TheTRIPSagreementwasframedbyitsadvocatesastheIPRagreementneeded

foraglobalisingworld.Buildingandthenexpandingonthefoundations

establishedbythe19thcenturysParisandBerneagreements,TRIPSextends

universalminimumstandardstoallWTOmembers.Theexistingagreementsand

theirsupervisingbody,theWorldIntellectualPropertyOrganization(WIPO)were

adjudgedtooweakbyIPR-advocatesbecausetheylackedanenforcement

mechanism(DrahosandBraithwaite2002).Theresultwasanagreementthat

extendeduniversalandenforceableminimumstandardsofIPRstoallWTO

members.CriticsofTRIPScontentthatthestandardsitdemandsarebasedon

thoseusedinIPR-producingnations.Assuch,theimplementationofTRIPS

provisionsisntconsideredinthebestinterestsofthelargelyIPR-consuming

developingworld.

ContentionhasarisensurroundingtheimpactoftheTRIPSagreementonaccess

tomedicinesinlow-incomenations.Publichealthadvocatesarguethatby

institutingpatentprotectionfordrugstheywillraisepricesandmakethem

inaccessibleforthemajorityofpatients7.Pharmaceuticalproducerscounterthat

patentprotectionandtheassociatedmonopolypricesareessentialtoprovide

incentivestoinnovatenewdrugs(PhRMA2008b).Theissueispertinentgiven

thehighburdenofcommunicablediseasepresentinthedevelopingworld

particularlytheHIV/AIDSepidemicthatisdevastatingsub-SaharanAfrica.

Context

ThereisasignificantbodyofcommentaryontheissueofTRIPSandaccessto

medicines.Inthepublicsphere,non-governmentalorganisations(NGOs)suchas

MdecinsSansFrontires(MSF),TheConsumerProjectonTechnology(CPTECH),

HealthActionInternational(HAI)andOxfamhavebeenparticularlyvocalcritics

oftheTRIPSagreement.Presentinganalternativeview,severalthink-tankslike

theWashingtonD.C.basedHudsonInstituteandindustrygroupssuchasthe

PharmaceuticalResearchManufacturersofAmerica(PhRMA)counterthese

7Foranexamplesee:Mayne(2004),Borrell&Watal(2003)andtHoen(2002).

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claims.Theyhave(aggressively)advocatedthepositionthatintellectual

propertyrights(IPRs)areessentialforcontinuedinnovationinthe

pharmaceuticalindustry.

Intheacademicsphere,theargumentsurroundingthepositiveandnegative

implicationsoftheTRIPSagreementhasfocusedonthetechnicallegaland

economicargumentsemployedbyadvocatesofbothpositions.Someacademics

arguethatifinitiatedtoitsfullextentTRIPScanhavesignificantnegative

implicationsfordevelopingnationsinarangeofsectorsincluding;agriculture,

traditionalknowledgeandpublichealth(Zutshi1998;Panagariya1999;'tHoen

2002;Mayne2004).Someauthors,likeBhagwati(2004)condemntheinclusion

ofIPRsinafreetradeagreementonthegroundsthattheyamounttosanctioned

protectionism.Stiglitz(2006)suggeststhatthisamountstogroundsforTRIPS

removalfromtheWTOframeworkentirely.Howeverappealingthislogicisat

theoreticallevelitisanunrealisticpolicysolution.Assuch,thisthesis

acknowledgesthatthecontinuedexistenceTRIPSisnotquestioned,andthatany

constructivepolicysolutionsneedtobecontainedwithinitsframework8.

FrameworkforAnalysis

ThisthesiswillexaminewhetherimplementationoftheTRIPSagreementwill(or

has)hinderedaccesstoessentialmedicines.Theconceptofaccessextends

beyondanexaminationofthedeterminantsofpharmaceuticalpricing.Pricingis

aprominentconsideration,however,itisnottheonlyimportantvariable.For

instance,thecostofadrugisirrelevantifnotreatmentisavailable.Whilesupply

chainperformanceisanimportantconcernregardingavailability,thekey

determinantliesindrugdevelopment.Finally,theaffordabilityofaninterventionisparamount.Whilethepriceofthedrugisanimportant

consideration,theissueextendstotheportionofthecostthatthepatientbears.

Accordingly,theprovisionofhealthinsurance,eitheratthegovernmentor

householdlevelwillbeadeterminingfactorregardingaffordability.

8Forthatreasonwhilepatentpoolsandotherpolicyinitiativesoutsidethe TRIPSumbrellahavebeenproposedbyvariouscommentators,theyremainoutsidethescopeofthisanalysis.

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InlightofthecurrentHIVepidemicandthechallengesitposesforeconomicand

socialdevelopmentinsub-SaharanAfrica,specialreferencewillbepaidtothe

provisionofantiretroviraltherapy(ART)inthethisregion.Despitethefocuson

HIV/AIDSandART,thefindingsofthisresearchshouldbeviewedasgeneralisabletootherdiseaseconditionsandthedrugsusedtotreatthem.Adequateaccessto

pharmaceuticalsisanessentialcomponentofahealthsystemsapproachto

controlcommunicabledisease.Giventhattheburdenoftheseconditionslies

disproportionatelyinthedevelopingworld,thisanalysisprimarilyfocuseson

theimplicationsofTRIPSfordevelopingnations.Furthermoregiventhatahigh

burdenofdiseasehassignificantimplicationsfordevelopment,theTRIPS

agreementcanhavepotentialflow-oneffectsforeconomicdevelopment.

Politicaleconomydrawsattentiontothepoliticalfactorsthatdetermine

economicpolicies(Black2002).Consideringthepresenceofcompetinginterests

surroundingthedebateontheimpactofIPRsondevelopmentandpublichealth,

thisissuelendsitselftoapoliticaleconomyperspective.Previousstudieshave

seenthedebateframedbyvariousactorsinacost-benefitmanner.AsGervais

(1998;2005)argues,thearrangedmarriageoftradeandIPmadeitinevitable

thatIPRswouldbemeasuredusinganeconomicyardstick.GiventhatTRIPSis

presentedbyitsproponentsasaboontodevelopingnationsitisappropriate

thatthisanalysisusesasimilarframeworktocriticallyanalysetheseassertions.

ThepoliticaldeterminantsoftradeandIPRsandtheroleofspecialinterest

groupsinagendasettingandprioritisingtheagreementsestablishmenthave

beenpreviouslypresentedbySell(2003)andDrahosandBraithwaite(2001;

2002;2003).Theirscholarship,whilepertinenttoafullcontextualanalysisof

theagreementliesoutsidethescopeofthisthesis.

Chapteroutline

Thesecondchapteroutlinestheconceptualthemesthatdominatethedebate

aroundtheroleofIPRsinfacilitatingtradeanddevelopment.Thefirstpart

providesanoverviewofthehistoricalnatureofIPRsandhowtheirkeypurpose

hasbeenmodifiedovertime.Itcontinueswithananalysisoftheeconomicsof

IPRsandthejustificationsusedtopursuesuchapolicy.Thenextpartexplores

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thecentralthemeofthechapter-theroleofIPRsinfacilitatinggrowththough

tradeandtechnologytransfer.Thisisdonethoughacomprehensivereviewof

therelevantliterature.Thechapterconcludeswithanoutlineofthecompeting

interestsinpursingIPRsthroughtrade.

ThethirdchapterintroducestheTRIPSagreementandexamineshowitrelatesto

thethemesintroducedintheconceptualchapter.Thechapterexploresthe

conceptofIPRsasaninfluenceoneconomicandsocialdevelopment.Specifically

theissueofhomogenousversusdifferentialIPRsfornationsatdifferentlevelsof

developmentisdiscussed.Thechapterbeginsbydiscussingthecontention

surroundingtheinclusionofIPRsinatradeagreement.Itcontinuesbycritically

reviewingTRIPSdevelopmentcredentials,particularlytheroleofTRIPSin

facilitatinggreaterlevelsofsocialandeconomicwelfare,technologytransferand

innovation.

Thefourthchapterintroducesthepublichealthchallengesthatdeveloping

nationsface.Itexplorespublichealthasadevelopmentissueandinvestigates

therelationshipbetweenhealth,economicgrowthandpoverty.Theburdenof

diseasefacedbylow-incomenationsiscentraltothisapproach.Thechallengeof

communicablediseaseisintroducedwithreferencetoTuberculosis(TB),

Malaria,HIV/AIDSandotherneglecteddiseases.Theimportanceofahealth

systemsapproachtoaddressingtheseissuesisoutlinedwithspecificreference

totheroleofpharmaceuticals.

ThefifthchapterinvestigationstheclaimthatTRIPSactstopreventaccessto

essentialmedicines.Itdiscussestherelevantargumentsrelatingtotheroleof

IPRsontheprice,affordabilityandavailabilityofmedicines.Thisleadsintothepenultimatechapterthatexaminestheeffectivenessofthesafeguardsbuiltinto

theagreement.Usingcasestudiesfromnationsthathaveutilisedthese

safeguards,thechapterseekstouncoverifthereisadifferencebetweenthe

rhetoricoftheDohaDeclarationandoutcomeswhentheyaretested.

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IntellectualPropertyRights,Trade&TechnologyTransfer

Theexistenceofarelationshipbetweenintellectualpropertyrights(IPRs),trade

andtechnologytransferhavebeenusedtojustifythecurrentIPRsparadigm

characterisedbytheWorldTradeOrganizations(WTO)trade-relatedaspectsof

intellectualproperty(TRIPS)agreement.Theextentofthisrelationshipandits

impactonIPR-importingnationsisthesubjectofintensecontentioninthe

literature.Thischapterseekstooutlinetheconceptualthemesthatdominatethe

debatesurroundingthepositedrelationshipbetweenIPRsandtrade.

ThefirstsectionexploresthehistoricalevolutionofIPRsandhowcompeting

positionshaveinfluencedthemodernparadigm.Itfollowswithadiscussionof

howhistoricalcontentionbetweenIPR-importingandIPR-exportingnationslead

totheinternationalisationofIPRsthroughtradeagreements.Thesecondsection

looksatthecompetingargumentssurroundingtheeconomicsofIPRsandtheir

relationshipwithtrade.Includedinthisoverviewisadiscussionofthestaticand

dynamiceffectsofuniversalprotectionandtherelationshipbetweenIPRs,trade

andtechnologytransfer.Thefinalsectionhighlightsthekeypointsofcontention

surroundingthisrelationshipandoutlinesthekeyissuesthatwillbeusedto

viewtheTRIPSagreementinsubsequentchapters.

OriginsofIntellectualPropertyRights

TheconceptofintellectualpropertyemergedoutoftheEuropeanenlightenment

(Hesse2002).Priortothisperiod,itwasthoughtthatinventorsandauthors

werenotthesolecreatorsoftheirwork.Theywereconsideredmerelyconduits

fordivineknowledge(Post,Giocarninisetal.1955).Canonlawdecreedthat

theyhadnorighttoprofitfromtheirideas9.AlthoughrudimentaryformsofIPRs

existedatthistime,theyservedamarkedlydifferentpurposefromwhatthey

9ThisconceptwasbasedontheCanonlaw:ScientiaDonumDeiEst,UndeVendiNonPotestthatdecreedthatknowledgewasagiftfromGodandaccordinglycouldnotbesold(Post,Giocarninisetal.1955).

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holdcurrently.Ratherthanspurringtheinventororauthortoinnovate,they

servedtoallowstateandreligiousinstitutionstocontroltheflowofinformation

(Hesse2002).Itwasthisprinciplethatin1469sawtheRepublicofVenicegrant

JohannSpeyerexclusiverightstooperatetheprintingpressinVeniceforfiveyears.Itfollowedin1474withadecreethatnewandinventivedevicesbe

registeredwiththestateinordertopreventothersfromutilisingthem

(Gerulaitis1976).Thisisoftencitedasthefirstformaliseduseofpatentingin

modernhistory.Thispatentwasinfactastategrantedprivilegethattraded

monopolyrightsforstatecensorshipandcontrol(Feather1980;Hesse2002).

AstheenlightenmentsinfluencespreadthroughoutEuropeauthorsbeganto

claimthattheirworkwastheirown,ratherthantheproductofdivine

intervention(Feather1980).Theinventionandwidespreaddisseminationof

theprintingpressprovidedfurtherimpetustotheirclaims(Hesse2002).With

nolegalprotectiontopreventpublishersfromreprintingtheirwork,authors

begantoarguethattheywereentitledtothesamelegalprotectionasafforded

othertypesofproperty(Hesse2002).Thisdiscourseinitiatedadebatebetween

Europeanphilosophersaboutthenatureofintellectualproperty.

PrivateversusPublicgood

Thedebatecentredonthecontentionaroundwhetherknowledgeisconsidered

aprivate10orapublicgood11.Ononeside,theutilitarianpositionorpublic

benefitrationalearguedthatthereisnonaturalpropertyinanidea.TheFrench

mathematicianCondorcetarguedthatknowledgewasobjectiveandtherefore

wasapublicgoodandassuchaccesstoitcouldonlyberestrictedifitwere

requiredtogenerateinnovation(Dallon2004).ThisargumentformedthebasisofTheStatuteofAnne(1710)fromwhichmodernintellectualproperty(IP)law

cantraceitsroots12.

10Aprivategoodconstitutesanygoodorservicethatifusedbyoneindividualorfirmisnotavailabletoothers(Black2002).11Apublicgoodisagoodorservicethat,ifprovided,isavailableforusebyallmembersof

society(Black2002).12TheEnglishstatutegrantedlimitedmonopolies(14years)toauthorsunderthepretextthatitwouldprovidethemwithadequateremunerationfortheirwork.Afterthemonopolyendsthe

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ThealternativepositionwasbasedonJohnLockestreatise,thatideasare

subjectiveandtheproductoftheindividualmind,andasaresult,theyconstitute

individualpropertyandshouldbeaffordedlegalprotection(Hesse2002).This

argumentformedthebasisfortheuniversalistornaturallawbasedpropertytheory(Dallon2004).Thepositionholdsthattheinnovatoristhesoleownerof

theirworkanditisonlyfairthattheycontrolit.Criticscontendthatthis

fairnessargumentignoresbothincentivefunctionsandthepublicsrightto

access13(Sterk2004).

TheInternationalisationofIntellectualProperty

PriortothesecondhalfofthenineteenthcenturytheregulationofIPwassolely

theresponsibilityofnationallegalsystems(May2006).Theindustrialrevolution

sawasignificantincreaseinglobaltradeflows,particularlybetweenthe

EuropeanindustrialpowersandtheUnitedStates.Thishadsignificant

ramificationsforIPowners.Inparticular,copyrightholdersarguedthattheirIP

wasviolatedbypublishersinjurisdictionswithlittleornoIPlaws.Charles

Dickens14wasonesuchauthor.OnavisittoNewYorkin1842hecomplained

thatAmericanspiratedbookswhichpreventedhimfromcapitalisingonhis

popularitythere(Kurlansky2006).Dickensassertionwascorrect,theUnited

StatesdidnotrecogniseforeignIPRsuntil1891andmanyAmericanpublishing

houseswereableestablishedtheirmarketpositionbypiratingforeignliterary

works(Dallon2004).Itissaidthattheyjustifiedthispracticeonthegrounds

thatwithoutit,theywouldnothavebeenpricedaccessiblytothegeneral

population(Hesse2002).Jurisdictionalindifferencewasacontributingcatalyst

forthefirstmajordiscussionofIPRsinaninternationalcontext.In1858,Victor

Hugo15convenedtheCongressofAuthorsandArtistsinBrussels,outofwhich

theprincipleofnationaltreatmentemerged.Inthiscontextnationaltreatment

workthenentersthepublicdomain(Feather1980).Thislawwasthefirstattempttofindacompromisebetweentheincentivesrequiredtospurinnovationwiththepublicsneedtoaccess.13Hesse(2002)providesagoodoverviewoftheoriginsandargumentsthatformthe

philosophicaldebatesurroundingthenatureofknowledge. 14FamousEnglishauthor.15FamousFrenchauthor.

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askseachnationtoaffordthesameIPrightstoforeignersastheywouldtheir

owncitizens(Hesse2002;Dallon2004).

Towardtheendofthe19thcenturythenetexportersofIPGreatBritain,France

andGermanyincreasinglyfavouredtheuniversalistclaimthatindividuals

possessthemoralandeconomicrightoftoprofitfromtheirinnovations.They

settoapplythisrightworldwidebyseekingtoextractmonopolyrentsfrom

foreignmarketsthroughthedevelopmentofinternationaltreaties.Despitethe

establishmentofnationaltreatment,increasingtechnologicalinnovation,

particularlyinindustrialproduction,ledtopatentholdersseekinguniversal

standardsfortheirinnovations.The1883ParisConventionfortheprotectionof

industrialpropertyestablishedunifiedinternationalstandardsforpatents,

trademarksandindustrialdesigns(WIPO1979b).The1886BerneConvention

fortheprotectionofLiteraryandArtisticWorksprovidedasimilarframework

forcopyrightstandards(WIPO1979a;Burger1988).Theemergingeconomiesof

thedaytheUnitedStatesandRussiawhowerenetimportersofIPrefusedto

signtheinternationalIPagreementsonthegroundsthatIPstandardswerea

nationalresponsibility(Burger1988).Bysettingweakerlevelsofprotection,

theywereabletofreelyreproduceinnovationsthatwouldassistintheir

economicdevelopment,withouthavingtopaymonopolyrentstoforeignfirms.

TheinternationalisationofIPRsthoughtreatiessupersededanationsabilityto

settheirownstatutorylimitsinfavourofuniversalstandards.Thisshiftinthe

legalspectrumoverthecourseofthe18thand19thcenturiesshiftedthe

internationalparadigmmarkedlyawayfromthepublicbenefitpositiontoward

theprotectionofindividualrights.Anexampleofthisistheextensionof

copyrightprotectionfromthe14yearsprovidedbytheStatueofAnneto

lifetimeplusfiftyyearsestablishedbytheBerneConvention(WIPO1979a;

Feather1980).

ExportersversusImporters

Asdiscussedpreviously,historically,IPRshavetraditionallybeenterritorial,in

thattheirdesignandlevelofaffordedprotectionhavevariedbetweennation

statesforavarietyofreasons.CountrieshavepursuedarangeofIPpoliciesto

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reflecttheirtermsoftrade.TheBerneandParisagreementshighlightedthe

differenceinprioritiesbetweenIPR-exportingandIPR-importingnations.For

instancetheUnitedStatesinitiallyopposedratificationoftheBerneandParis

agreements.AsitbecameanetexporterofIP,itslegaldoctrineshiftedtowardastronguniversalistapproach(Dallon2004).

ThroughtheestablishmentofinternationaltreatiesIPR-exportershavesoughtto

extractmonopolyrentsfromIPR-importers.Leavingasidewhetherthepolicyof

weakIPRprotectionisfairtoIPRholdersintheIPR-exportingnations,itisnotin

thebestinterestsofIPR-importingnationstopursuethisapproach.Countries

thatarenetimportersofIPRstendtohaveweakerIPRprotectionbecausetheydo

notproduceenoughinnovativeresearchanddevelopment(R&D)tojustifythe

existenceofalegalsystemtoprotectit(LaiandQiu2003).

Aneconomicrationale

Thepublic-benefitrationalewasformalisedineconomictheorybyArrow

(1962).Economictheoryholdsthatknowledgeisanon-rivalgood.Assuchit

shouldbefreelyavailableminusthecostoftransmittingit.Arrowcontendsthat

inaclosedeconomyifallknowledgeexistedinthepublicdomainthen

innovatorswouldbeunabletorecouptheirinvestment.Inthelongrunthis

wouldresultinthemarketunderinvestingintheproductionofnewknowledge.

AccordingtoArrow,theoptimaltradeoffinthiscontextwouldbetointroducea

temporarystaticdistortionintheformofmonopolyrightstoprovideadynamic

incentivefortheproductionofnewknowledge.Inotherwords,IPRsareessential

tocorrectthemarketsunderinvestmentininnovation.

Nonetheless,thereisatradeoffbetweenthedynamicbenefitsofinnovationwith

thestaticlossesfrommonopolyrights.Consideringthewelfarelossesfrom

monopoly,Stiglitz(2006)arguesthatIPRsneedtobeconsideredasecond-best

alternativeandasanecessaryevilratherthananoptimalsolution.Thisraises

thequestion,howmuchmonopolypowershouldbeconferredtoinnovators?A

numberofstudieshaveattemptedtocalculatetheoptimallengthofpatent

protection(Nordhaus1969;Nordhaus1972;Scherer1972).Nordhaus(1969)

derivedthedeadweightlossfrompatent-conferredmonopolyusingArrows

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generalequilibriummodel.Nordhausarguesthatanoptimalpatentsystem

wouldprovidedifferentlevelsofpatentprotectionaccordingtotheinnovations

novelty.IncontrastGilbertandShapiro(1990)foundthatinsomesituations

theoptimallengthmaybeinfiniteifthemarketpowerfromthepatentissufficientlyweak.Thesestudies,andotherattemptstocalculatetheoptimal

patentlengthsaremodeledonclosedeconomiesoperatingunderaseriesof

fixedassumptions,includingmarketsizeandpurchasingpower.Recognising

this,Nordhaus(1969;1972)cautionsthathisnumericalconclusionshavetoo

manycaveatstobeapplicableinapolicysetting.Thesestudiesrevealthatan

optimalpatentsystemisafunctionofthemarketsdemandcurveand

purchasingpower.Consequently,theimpactofannovelinnovationin

Nordhaus(1969)modelwouldlikelyvarybetweendifferentmarkets.Whatis

consideredoptimalinonemarketmaynotapplyinanother,thusunlessall

marketssharethesamedemandcurveforaparticulargoodthenitisnot

possibletogenerateasingleoptimalworldpatent.

TheEconomicsofIntellectualPropertyRights&Trade

ThereisaviewintheeconomicsliteraturethatIPRsareacontributingfactorto

tradeflowsthroughforeigndirectinvestment(FDI)andtechnologytransfer.

However,contentionisfocusedonseveralissues,namelythenatureofthecausal

linkbetweentradeandIPRs,thewelfareeffectsofuniversalminimumstandards

andtowhatlevelminimumstandardsshouldbeset.Asimplisticargument

followsthatIPRsaffecttradewhenknowledge-intensivegoodsaretradedacross

borders.FinkandPrimoBraga(2005)arguethatthislinkageisincreasingly

importantastheproportionofknowledge-intensiveandhightechnology

productsthatcompriseglobaltradeflowshasincreasedsignificantlysincethe

1970s16.Thishasgeneratedsignificantdebateintheliteratureoverthe

increasingimportanceofIPRsinglobaltrade.Principally,whatistherelationship

betweentradeandgrowthandhowdoIPRsaffectthis?

16Between1980and1994high-technologyproductsshareofglobaltradedoubledfrom12%to24%(FinkandPrimoBraga2005).

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Development&Trade

Numerousempiricalstudieshaveestablishedapositiverelationshipbetween

tradeandeconomicdevelopment(Dollar1992;SachsandWerner1995)17.Itis

arguedthattradeisimportantfordevelopmentasitcanstimulategrowthby

providinglargermarketsfordomesticfirms,itcanalsofacilitatedomestic

innovationthroughtechnologytransfer.Itisinthiscontextthatincreasingtrade

flowsareconsideredimportantfromadevelopmentperspective.Theliterature

isrichwiththeoreticalstudiesthatexploretherelationshipbetweenIPRs,

internationaltradeandeconomicgrowth.CurrenttrendssuggestthatIPRsare

oneofthemanyfactorsthatinfluencetradeflows(Segerstrom,Anantetal.1990;

GrossmanandHelpman1991;Helpman1993;Taylor1994).IntheoryIPRscan

affectgrowthbyprovidinganincentivetoinnovate,whichcanbeinfluencedby

thestatusofinternationalIPRlaws.Forinstance,arationalinnovatorwillnot

tradeinaforeignmarketiftheyperceivethattheirIPmightbecompromised.

Furthermore,theorydictatesthatifIPRsexistinallmarketsthentradeflows

(andgrowth)willincreaseworldwide(LaiandQiu2003).

Theoreticalevidence

Intheory,theexistenceofapositivelinkbetweenIPRsandtradeisambiguous.

Thissectionoffersabriefoverviewofthemodelledtheoryfromtheliterature.

Themodelsbelowfeaturetwotradingnationshomeandforeign.Foreach

modelthestaticanddynamicwelfareeffectsofincreasedIPRprotectionontrade

flowsareconsidered.

Partialequilibriummodel

Usingastaticpartialequilibriummodelthehomecountryislikelytogainfrom

theincreaseinmonopolyprofitsthatthenewfoundIPRsinforeignprovide.This

islikelytocausewelfarelossesforforeignasgreatermarketpowerforhome-

basedmonopolistsgeneratesdeadweightlosses(Deardorff1992;Maskusand

Konan1994).TheresultsfromthismodelhavebeenusedbymanysmallIPR-

importingnationstoarguethatIPandtradelinkageswillonlyresultin

17Acounterargumentforthispositionisprovidedby(RodriguezandRodrik1999).

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transferringmonopolyrentstoIPR-exportingnations(FinkandPrimoBraga

2005).

Generalequilibriummodel

AstaticgeneralequilibriummodelalsofindsthattheIPRimportingcountry

foreignisworseoff.Inthiscase,IPRsdistortthetermsoftradesuchthat

productionisshiftedfromforeigntohome(FinkandPrimoBraga2005).This

reallocationofproductionmayadverselyaffectwelfareinbothcountriesas

efficientallocationholdsthatmanufacturingshouldbelocatedinthecountry

withthelowestcosts.Thesewelfareimplicationsmaybesomewhatoffsetbyan

increaseinforeigndirectinvestment(FinkandPrimoBraga2005).

Dynamicmodel

Inadynamicmodel,theintroductionofIPRsinhomewillstimulateinnovation

intheprivatesector,whichwillincreasetradeflowsinthelongrun.Assuming

thatthesocialreturnsexceedtheprivatereturnsfromthetemporarymonopoly,

themodelholdsthatbothhomeandforeignwillbenefit(FinkandPrimoBraga

2005).FischandSpeyer(1995)concludethatthemodelfindsthatthe

internationalisationofIPRswillserveasanadjustmentmechanismthat

encouragescompetitionbetweencountries.Thisisachievedasinnovation-

exportingnationsdevelopnewtechnology,whichinturnwilllaterbe

manufacturedbyinnovation-importingnations.AsaresultIPRprotectioncreates

asustainablemodeloftechnologicalinnovationanddiffusionthatbenefitsboth

tradingpartners.

Empiricalevidence

AnumberofempiricalstudieshavetriedtoexaminethelinkagebetweenIPRs

andtrade.MaskusandPenubarti(1995),PrimoBragaandFink(1997)andFink

andPrimoBraga(2005)allanalysedtradedatausingaseriesofmodels(gravity

andHelpman-Krugman).Allfoundapositiverelationshipbetweentradeflows

andincreasedIPRs.However,itshouldbenotedthattherearemanyother

contributingfactorsthatinfluencetradeflowsofwhichIPRsofferarelatively

minorcontribution.

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venture(JV)projects18(Correa1999).Informalchannelsalsoexist,usuallywhen

afirmchoosesnottoenteramarket.Theyincludeimitation,reverseengineering

anddevelopingnewprocessestoproducethesameproduct(Acs,Audretschet

al.2005).Theexistenceofamultitudeofchannelsthroughwhichtechnologytransfercanoccurmakesitdifficulttoderivetheimpactofanysinglechannelon

aggregateeconomicgrowth.MostoftheresearchhasinvestigatedtheroleofFDI

andtradefacilitatingtechnologytransferandthisreviewreflectsthattrend.

Trade,GrowthandTechnologyTransfer:Theory

NeoclassicalTheory

Neoclassicalgrowththeory,basedonSolows(1956)modelholdsthatsavings

andinvestmentarethekeydeterminantsofgrowth.Inthiscontextthetheory

assumescostlesstechnologytransferthroughtheexistenceofidentical

productionfunctionsinallmarkets.ParenteandPrescott(1994)andPritchett

(1997)arguethatregulatorybarriers,weakpoliticalinstitutions,socialfactors

andlegalsystemsareacontributingfactortothedifferenceinpercapitaincome

acrosscountries,affectingtheirgrowthrate.Inthismodeltrademaylower

barrierstotechnology,therebyassistinggrowth.

NewGrowthTheory

TheendogenousNewGrowthmodelemphasizestheroleoftechnologicalchange

andhumancapitalindrivinginnovationandgrowth.TheR&Dbasedmodelsof

Romer(1990),Grossman&Helpman(1991)andAghionandHowitt(1992)

sharethecommonthemeofentrepreneursconductingR&Dtocapture

temporarymonopolyrightsthoroughIPRs.Empiricalanalysisofthemodelshasyielded,atbest,ambiguousresults(Pack1994;Jones1995b;Jones1995a).

However,Saggi(2002)arguesthatthisdoesntdiscounttheroleofR&Din

fosteringinnovativeandeconomicgrowth.Insteadhecontendsthatattheir

infantstagethemodelsareyettocapturethisrelationship.Buildinguponthis,

endogenousmodelsincorporatingmulti-countryanalysishavefoundthat

knowledgespillovershaveacleargeographicalcomponent(Grossmanand

18Thefinaloptionistochoosenottoservethemarketatall.

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Helpman1995).Tradebetweensimilarcountries(i.e.developedeconomies)

providesdifferentoutcomesthantradeinaNorth-Southmodel(i.e.

developed/developingeconomies).Likewisethereisanotabledifference

betweenthedisseminationoftechnologyatthedomesticandinternationallevel19.Furthermore,North-Southmodelsbasedontheconceptofaproduct

cycle20haveprovidedsomeusefulinsightsintotheroleofR&Dandknowledge

spilloversasdriversofgrowth(Krugman1979;GrossmanandHelpman1991;

Rivera-BatizandRomer1991).GrossmanandHelpman(1995)highlightthe

importanceofthenatureofthespilloversindeterminingtheoutcomesfor

growth.Ifthespilloversoccurattheinternationallevelthenthemodelholds

thattradebenefitsgrowth,butiftheyoccuratthenationallevelthentheireffect

isambiguous.SincemostNorth-Southtradeimpliesinternationalspilloversitis

onlyNorth-Northtradethatcanbepotentiallydetrimental.

Theliteraturesupportstheideathatakeydeterminantoftechnologicalchange

isthelevelofR&Dundertakenbyinnovatorsseekingtocapturetemporary

monopolypowerthroughIPRs.Asaresultinnovatorshaveaverystrong

incentivetoprotecttheirIPRs.Withoutsuchasystem,theylackastrong

incentivetoinnovate21.

KnowledgeSpillovers

Arrow(1962)acknowledgesthatknowledgeisdifferentfromotherfactorsof

productioninthatanincreaseinknowledgedoesnotnecessarilytranslateinto

ansubsequentincreaseineconomicgrowth.Arrowdescribesthisgapbetween

knowledgeandeconomicknowledgeasaknowledgefilter.Essentiallyit

followsthatjustbecauseonepossesstheblueprintstoproduceanewproduct

19Internationaldiffusionencountersbarriersthatdomesticdisseminationavoids,forexampleinternationalinvestorsneedtoconsidertradebarriersandvariationsinmarketconditions(Saggi2002).20ProductcyclemodelsassumethatinnovationoccursintheNorth.SouthernproducersareabletocompetethroughthesuccessfulimitationofaNorthernproduct.Inthemodel,agoodisproducedintheNorthuntilitissuperseded(inthequalityladdersvariant)orimitatedbyaSouthernfirm,atthispointitisnolongerprofitablefortheNorthernfirmtoproducetoproduct.Asaresultproductioneitherceases(iftheproductissuperseded)orshiftstotheSouth(Saggi

2002).21Theirincentivemayalsobeaffectedbytherateatwhichtheirproductisspreadinternationally(Saggi2002).

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doesnotfollowthattheyhavetheabilitytoreproduceit22.Theextenttowhich

tradeandFDIoperateasmechanismsoftechnologytransferisdeterminedby

knowledgespilloverthatoccursasanexternality(Acs,Audretschetal.2005).

Scherer(1965)findsthatknowledgespilloversaremorelikelytooccurinhightechnologysettings(comparedtoalowtechnologycontext)wheremore

opportunitiesfordevelopmentexist.Theabilityofafirmtotransfer

knowledgeisdirectlyrelatedtoboththeirindustry(R&Dintensiveversuslow

technology)andthehostsmarketsabilitytoabsorbthenewtechnology,which

isafunctionofitsinfrastructure,humancapital,educationlevelsandbusiness

climate.Withthatinmind,therearethreemainchannelsofspillovers:

demonstrationeffects,labourturnoverandverticallinkages.

Thedemonstrationeffectarguesthatlocalfirmsexposuretonewmethodsof

hightechnologyproductionusedbyMNCswillspurthemtodeveloptheirown

productionmethodsthroughimitationorreverseengineering(Parenteand

Prescott1994)23.Conversely,thelabourturnovermodelplacessignificant

importanceintoembeddedknowledgeinhumancapital.Itholdsthat

employeesofMNCsdevelopskillsthattheycanthentransfertodomesticfirms

(Pack1997).Finally,theverticallinkagesmodelfirstdevelopedbyRodriguez-

Clare(1996)statesthattheextensivelinkagesthatMNCsbuildwithlocaland

internationalmarketsimprovesnationalwelfare.Itdoesntoffermuchinsight

intotechnologicaldiffusion.Theempiricalevidenceonthisprovidesmixed

22Romer(1990)expandsonArrowsinsightbydividingtechnicalknowledgeintotwosubsets.Thefirstset,partiallyexcludablenon-rivalgoodsincludethecodifiedknowledgeheldinbooks,patentsandblueprints.Theseareessentiallypublicgoodsmadepartiallyexcludabletoencourageinnovation.Ontheotherhandexcludableknowledgeisaprivategoodandincludesknowledgegainedfrompersonalexperience.23Despitetheexistenceofahostofviablealternativesincludinglicensing,exportsandjointventures,MNCshaveemergedasthekeydriversoftechnologytransferthrough FDI.Dunning(1988;1993)developedamodeltoexplainwhyfirmsoptforparticularmarketentrystrategies.HisOLImodel(ownership,locationandinternalisation)hasformedthebasisforasignificantbodyofworkintheinternationalbusinessliterature.Briefly,ownershipadvantages( FDIversusJV)providesMNCswiththeabilitytoprotecttheirknowledge,technologyandbranding.Locationfactorsincludingmarketsize,labourcostsandthebusinessclimatearekeydeterminantsofentryoptions,IPRsareoneofthemanydeterminantshere.Finallyinternalisationexaminesthe

incentivetoundertakeFDIasopposedtootheroptions.Therearearangeoffactorsthatcontributetothedecisiontointernalisethrough FDI,howevertheliteraturesuggeststhatifsecureIPRprotectionexiststhenlicensingwillbepreferredover FDI.

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resultsonthebehaviourofspillovers24.Thedemonstrationeffecthingesonthe

abilityofadomesticfirmsabilitytoimitatetheproductandproduction

methodswithresultsvaryingbyindustryandcountry.Thelabourturnover

modelassumesthatlocallabourisemployedinarolethatwillexposethemtoknowledge,thatwillallowthemtotransferrelevantskillstoadomesticfirm.

Againtheresultsismixedandthefindingsvarybyindustryandcountry.Saggi

(2002)findsthatverticallinkagesaremorelikelytobeimportantthanthe

horizontallinkagesdiscussedpreviously.Theresultsfromthesestudies

suggestthatMNCsaremoreefficientproducersthandomesticfirms.

Consequently,domesticfirmsarecompelledtousetheirresourcesinamore

efficientmanner.

Theliteraturehasfocusedontherelativeeffectivenessofthevariouschannels

ofknowledgespilloversindevelopedeconomieswiththeinfrastructureto

providesignificantscopefortechnologytransfer.Therehasbeenverylittle

analysisofhowspilloversbehaveinalessdevelopedeconomywherethe

endowmentsofinfrastructureandhumancapitalvarysignificantly.This

undoubtedlyhassignificantimplicationsforboththebehaviouroffirms

enteringthemarketandthequalityofknowledgetransferredtolocalfirms.

TechnologyTransfer&IntellectualPropertyRights

Thetheoreticalliteraturedoesnotprovideadefinitiveanswertowhether

strongerIPRprotectionincreasesFDIandeconomicgrowthintheSouth.Froma

globalefficiencyperspectivetheliteraturearguesthatglobalIPRprotection

wouldprovideanetwelfareincrease.Forexample,Taylor(1994)findsthatan

asymmetricsystemofIPRsdistortsthepatternofglobaltrade,thuscreatinga

significantopportunitycostofIPRprotectionintheformoflowerglobal

growth25.GrossmanandHelpman(1991)contendthisbyarguingthatincreased

IPRprotectionisnotintheinterestsoftheSouthandthatweakenforcementmay

actuallybenefittheNorth.Alternatively,YangandMaskus(2001)findthat

24SeeSaggi(2002)foracomprehensivediscussionofthefindings.25MaskusandPenbarti(1995)arguethatthedefinitionofdistortionisunusualasthereisnoclearyardstickfromwhichtodetermineanoptimalgloballevel.

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increasedprotectionintheSouthleadstoincreaseddomesticinnovationand

foreignlicensing.Fromthesemacrofindingsitwouldbehardtodeducea

meaningfulconclusion,thankfullytheliteraturediscussestheroleofIPRsand

technologytransferatthemarketandfirmlevel.

TheimportanceofIPRstoFDIisadirectlyrelatedtothecompositionofthe

investment.SomeindustriesaremorereliantonIPRprotectionthanothers,for

instance,pharmaceuticalmanufacturersaremoresensitivetoIPRprotection

thanheavyindustry.Smarzynska(2000)findsthatIPRprotectionisa

determinantofthedecisionmakingprocessforfirmsinIPRsensitivesectors.In

thesameveinLeeandMansfields(1996)firmsurveyfoundthattheimportance

investorsplacedinIPRprotectionwasrelatedtothepurposeoftheproject.For

instance,iftheprojectisasalesanddistributionsetuponly20%offirms

considerIPRsimportanthowever,attheotherendofthescale80%offirms

engaginginanR&DintensiveinvestmentconsiderIPRsimportant.Thereforein

thepresenceofweakIPRprotection,foreignfirmsaremorelikelytoestablish

salesandmarketingventurestominimizetheriskoftechnologyleakage.

ThedebateoverwhetherIPRsareconductivetogreaterFDIflowsiswithouta

consensus.LeeandMansfield(1996)andSmith(1999)findapositive

relationshipbetweenIPRprotectionandthevolumeofU.S.FDI,howeverthe

causativerelationshiphasbeenquestionedbyFerrantino(1993)andPrimo

BragaandFink(2000)whofoundnosuchrelationship.

Conclusion

TheeconomicsliteratureonIPRsandtradeisvoluminous.Theliteraturesuggests

thatarelationshipexistsbetweentradeflows,FDIandtechnologytransfer.An

argumentcanbemadethatIPRsarerelatedtotradethroughtechnologytransfer,

yettheextenttowhichthatrelationshipcanbebuiltuponiscontested.Atthe

firmandindustrylevel,anationsIPRpolicymayinfluencethecompositionofFDI

andiftheIPRpolicyisweakafirmmaychoosetoignorethemarket.

Furthermore,aweakIPRsystemmayseeafirmelectingtochooseFDIover

licensingandpotentiallydiminishingtheprospectsoftechnologytransfer.

Finally,anasymmetricIPRssystemisclearlyidealtoproducersinthedeveloped

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world,butoutcomesfordevelopingcountriesareambiguous.Althoughthereisa

significantamountofdiscussionovertheroleofstrongorweakIPRsontrade

flows,therehasbeenlittleattempttobalanceinnovatorsincentiveswiththe

publicsneedforaccess.

TheliteraturepresentsthecasethataglobalIPRssystemwillprovidenetglobal

welfaregains.However,thenetwelfareimprovementisamisrepresentationof

thebenefitsfromsuchasystem.AllitprovesisthatthecoststoIPR-importing

nationsarelessthanthebenefitstoIPR-exportingnations.Furthermore,when

thewelfarecalculationsareexaminedatanationalorsectorleveltheresults

suggestthattheywillimpactIPR-exportingandIPR-importingnationsdifferently.

TrendsintheliteraturesuggeststhatuniversalstandardswilldetrimentaltoIPR-

importingnations,especiallyiftheyaresetatthelevelofprotectionaffordedin

IPR-exportingnations.Furthermore,itisnotclearthatthedynamicgainsfrom

technologytransferoutweighthestaticlossesfrommonopolythatIPRsconferfor

IPR-importingnations.

TheliteratureislargelyfocusedonthegainsfromtradeforIPR-exporting

nations.ThereisanemergingbodyofworkhighlightingtheimpactofIPRson

tradefromanIPR-importingperspective.ItshowsthataweakIPRsystemisthe

bestpolicyoptionforIPR-importingnationsanditmayevenbeinthebest

interestsofIPR-exportingnations.Thus,fromaneconomicwelfareperspective

thereisastrongcaseforthedifferentiationofIPRsystemsbetweenIPRproducers

andtherestoftheworld.

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ImplicationsforTradeandTechnologyTransferunderTRIPS

Intellectualpropertyrights(IPRs)seektobalancetheincentivesneededfor

individualsandfirmstogenerateinnovativenewtechnologieswiththepublics

needtoaccessthem.Contentionsurroundswhattheoptimalbalancebetween

thesecompetingforcesmightbe.Currentthemesintheliteraturesuggestthata

societysoptimallevelofIPRprotectionvariesaccordingtoitslevelofeconomic

development(Sachs2001;Barton,Alexanderetal.2002).Thismeansthata

developedeconomysoptimalpatentpolicywouldvarysignificantlywiththatof

adevelopingcounterpart.

TheWorldTradeOrganizations(WTO)1994agreementonTrade-Related

aspectsofIntellectualPropertyRights(TRIPS)establishedminimumenforceable

IPRstandardsforWTOmembers(WTO1994).Theseminimumstandardsare

basedonU.S.&EUlaw(Gervais1998;2005).Asaresult,anargumentcouldbe

presentedthatframestheTRIPSagreementasreflectingtheinterestsofIPR

holdersinthedevelopedworld.Accordingly,TRIPShasthepotentialto

significantlyalterthetermsoftradeforbothdevelopedanddevelopingnations

(Ferrantino1993;Goldin,Knudsenetal.1993;FinkandPrimoBraga2005).Itis

foritsimpactondevelopingnations,particularlyregardingaccesstoessential

medicinesthathaveseenitbecomethesubjectofintenseworldwidecriticism

(Wilson,Cawthorneetal.1999).ThischapterexaminesTRIPSimpactontrade

anddevelopmentwithspecificreferencetotheimpactoftheagreementon

developingcountries.Thefirstsectionlooksattheargumentssurroundingthe

inclusionofIPRsinatradeagreement.Thesecondpartexaminesthepartofthe

agreementrelevanttodevelopmentandoutlinesitsclaims.Thethirdsection

analysestheroleofTRIPSinfacilitatingitsclaimsofgreatersocialandeconomic

welfare,increasedtechnologytransferandinnovationandthefinalsection

examinesthecostsofTRIPStodevelopingcountries.

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TradeLiberalisationandTRIPS

TheGATT26/WTOsgoalisdesignedtomaketradefreerthoughliberalising

barrierstotradeflows.PriortotheUruguayRound,theGATThadfocusedits

effortsonthereductionandremovaloftariffsandpromotingequalaccessto

markets.WiththeinsertionoftheTRIPSagreementintheWTOsmandatein1994,

theinstitutionsliberalisationcredentialshavebeenquestioned.Foran

organisationbasedontenetsoffreemarkets,theinclusionofaninherently

protectionistagreementonIPRssetsadangerousprecedent27.

Bydefinition,tradeliberalisationbenefitsboththereformingcountryandallof

itstradingpartners(KrugmanandObstfeld2005).Panagariya(1999)argues

thattheoretically,inamultilateralcontexttradeliberalisationprovides

significantefficiencygainswhilstminimisingthedistortiveeffectsof

redistribution.Hereinliesthedifferencebetweentradeissuesandnon-trade

issues.ItemssuchasIPRs,labourstandardsandenvironmentalconsiderations

yieldundeterminedefficiencygainswhilstcontributingconsiderable

redistributiveeffectsintheformofadditionalrentsthatdonotbenefitall

nationsequally(Panagariya1999).Forinstance,producersinhigh-income

countries(HICs)possessalmostalloftheworldsstockofIPRs,thusTRIPSprovides

additionalrentstothemattheexpenseofconsumersandwelfareinemerging

anddevelopingeconomies(Maskus2001a).

IthasbeensuggestedthattheinclusionofTRIPShassettheprecedentforthe

inclusionofothernon-traderelatedissuesintotheWTO.Bhagwati(2004)has

beenespeciallycriticalofthislinkage,arguingthatTRIPShascausedtheWTOto

growathirdlegwhichthreatenstodistortthebenefitsoftradeandslowdownprogress28.Furthermore,ithasgivencredencetoadvocatesfavouringthe

26GeneralAgreementonTariffs&Trade,theforerunnertothecurrentWTO.27TheinclusionofIPRsinTRIPShavebeencitedasajustificationfortheinclusionofenvironmentalorlabourstandardsastradeissues.Thisiscontroversialbecauseeachissuealreadyhasadedicatedmultilateralagencyforthatpurpose:environmentalissues( UNEP),labour

standards(ILO)andintellectualproperty(WIPO).28InBhagwatis(2004)viewthetwolegitimatecomponentsoftheWTOaretheGATT(GeneralAgreementonTariffsandTrade)andGATS(GeneralAgreementonTradeinServices).

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inclusionofothertrade-relatedissuesincludingthesocialclause29.The

InternationalLabourOrganization(ILO)hasbeenaproponentofsuchaposition

andexplicitlycitesTRIPSasaprecedentforitsinclusionintheWTO(Lim2008)30.

Panagariya(1999)arguesthatanynewadditiontotheWTOshouldbeadjudged

onthreecriteria.Firstly,doestheprovisionpromotetradeliberalisation?

Secondly,willitimproveworldeconomicwelfare?Finally,willitimprovethe

economicwelfareofeachWTOmember?Thischapteraddressestheproposition

thatTRIPSfailstomeetboththefirstandthirdcriteriaandacredibleargument

hasbeenmountedthatitdoesntmeetthesecond31.

TRIPSasaDevelopmentissue

Inthepreamble,TRIPSrecognisesthatIPRSareprivaterights(WTO1994).This

impliesthatIPisworthyoftheprotectionaffordedothertypesofproperty.

AcknowledgementofthisinTRIPSreinforcesthepredominanceoftherightsof

innovatorsandtheprivatenatureofknowledgeinthecurrentIPparadigm.As

discussedinChapter2,thisisaninterpretationfavouredbyIPR-exportersinthe

developedworldasitexplicitlyreflectstheirinterests.Ontheotherhand,IPR-

importersfavourapublic-benefitapproach,becauseitreducesthecostof

technicalknowledge.Ratherthanrecognisingthisdisparityandinstitutinga

tieredsystem,TRIPSincludesuniversalminimumstandards.Theeconometric

evidencepresentedinthepreviouschaptersuggeststhatsuchasystemdoesnot

benefitallnationsequally.ThusbyinsertinguniversalIPRprotectioninTRIPSthe

WTOhasdevelopedasystemthatreflectstheinterestsofIPR-exportersinthe

developedworld.

29Thisconceptgainedsignificantmomentumforarangeofreasonsinthedevelopedworld,particularlyfromNGOsandunionsliketheAFL-CIOandICFTU.Forthevariouspositionsanddiscussionsee:ICFTU(2008),ChanandRoss(2003).30opponentsofthesocialclausearguethatalllabourissuesshouldbedealtwithsolelybytheILOandthattheWTOonlyhasamandatetodealwithtradeissuesTheWTO,forinstance,hasestablishedanagreementonintellectualpropertydespitethefactthattheWorldIntellectual

PropertyOrganization(WIPO)istheorganizationspecialisinginsuchissues(Lim2008).31Foratechnicalanalysisofthisargumentsee:Deardorff(1992)andPanagariya(1999).Foracommentarysee:Bhagwati(2004).

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Contrarytotheargumentsarticulatedpreviously,Article7ofTRIPSexplicitly

statesthatthegainsfromIPRprotectionbenefitbothIPR-importersandIPR-

exportersequally:

protectionandenforcementofintellectualpropertyrightsshouldcontributeto

thepromotionoftechnologicalinnovationandthetransferanddisseminationof

technology,tothemutualadvantageofproducersandusersoftechnological

knowledgeandinamannerconducivetosocialandeconomicwelfare32

ToborrowBhagwatis(2004)logic,itdoesnotfollowthatdevelopingcountries

shouldsomehowbenefitfrompayingmonopolyrentsforwhattheypreviously

receivedfreely.Moreover,Article7alsoimpliesthatallpartieswillbenefitfrom

increasedtechnologytransferandsocialandeconomicwelfare.Theaccuracyof

theseassertionshasbeenthesubjectofongoingcontentionintheliterature

(Maskus2005).ThusTRIPShasimportantdevelopmentimplications,thenext

sectionanalysestheaccuracyoftheassertionsmadeinArticle7andthe

implicationstheyhaveforeconomicandsocialwelfareindevelopingcountries.

SocialandEconomicWelfare

IrrationalExuberance33

ProjectionsdoneduringthenegotiatingperiodoftheUruguayround,citedthat

theresultantglobalwelfaregainscouldrangefrom$US53-260billionannually

(Francois,McDonaldetal.1995;Harrison,Rutherfordetal.1997)34.Ofthat,net

worldgain,between$US5-90billionwasanticipatedtoaccruetodeveloping

countries.AnOECD(1993)studycalculatedthatasmuchas33%oftheglobal

windfallwouldbenefitthepoor.Subsequentanalysisrevealedthattheinitialprojectionswereonlymodelledfrompartialimplementationofthetreaty35.

Thusthenetglobalgainsmaskthefactthatsomenationsendedupinaworse

32From:WTO(1994),Article7.33ThistermwasborrowedfromthetitleofabookbyShiller(2005).34Post-Marrakesh,theworldfigurewasupgradedbythe GATTSecretariattoa$US500billiongainperannum(StiglitzandCharlton2005).Formoreinformationabouttherangeofprojectedgains,TableA3.1detailsthemintheAppendix.

35Thebenefitsfromtariffreductionswereincluded,butothercostssuchascomplianceexpensesandadditionalprovisions(suchasTRIPS)werenotseeTableA3.1fordetailsofthemodelsintheAppendix.

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position.TheUNDP(1997)assertsthattheUruguayroundcoststheleast

developedcountries(LDCs)$US600billionperyear,forSub-SaharanAfricathe

poorestregionintheworldthefigureincreasesto$US1.2billion.Clearlythe

gainsfromtradearenotsharedequally,andwiththiscontextinmindthewelfarelossesfromTRIPSrepresentanadditionalexpense.

WelfareEffects

Asnotedinthepreviouschapter,knowledgeisinherentlyapublicgood.

Consumptionofinnovationisthereforebothnon-excludableinthat

informationdoesnotdeteriorateinqualityifmorethanoneindividualuses

concurrentlyandnon-rivalrous,whichholdsthatnoonecanpreventanother

fromutilisingtheinformation.AsArrow(1962)noted,withoutIPRsthiscould

resultintheundersupplyofnewinnovationstothemarket.Intellectualproperty

rightsaresupposedtofixthis,yettheevolutionofIPRsinthedevelopedworld

hasseenthemchangefromservingasamarket-correctiontoamonopoly

protector.

Amongothers,Scherer(2004)andPanagariya(1999)arguethatthepatent

lengthsofferedinsomenationshavenorelationshipwiththeinnovationsthey

areattemptingtofacilitate.Inotherwords,strongIPRsareaproductofrent-

seekingbehaviourbymonopolists.The20yearsofpatentprotectionaffordedin

TRIPShasbeenderidedbymanyasexcessive(DrahosandBraithwaite2002;

Stiglitz2006).Deardorff(1992;1994)examinedtheimpactoftheuniversal

strongpatentprotectionondevelopingcountries.Heassumedthatdeveloping

nationsareprimarilytechnologyimitatorsandwouldnormallyaffordshorter

patentsthandevelopedeconomies36.Deardorffsresultshighlighttwoimplications,byincreasingtheirpatentprotection,developingnationsare

sufferingfromagreaterrelativewelfarelossthatdevelopednations.Thisis

becausedevelopingcountrieshavetovarytheirIPRregimesignificantlywhereas

onaveragedevelopednationsalreadyofferstrongprotection.Furthermore,the

resultantincreaseinmonopolythroughpatentsraisesthepriceofknowledge-

36Deardorffsmodelassumedthatdevelopingnationswouldofferpatentslasting5yearsanddevelopednationswouldoffertheTRIPSstandardof20years.

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intensivegoodsandtransferstheadditionalconsumerexpendituretoIPR

holdersoffshore.AsPanagariya(1999)notes,thisincreasesincomeindeveloped

countriesattheexpenseofconsumersandproducersindevelopingcountries,as

aresulttheirlossisgreaterthanthewelfarelossestotheworldasawhole.

IncreasedIPRprotectionhasbeentoutedasapossibleboonfordeveloped

nations,asitshouldspurlocalinnovation(Taylor1993;1994;Saggi2002).The

literaturecoveredinChapter2suggeststhatthismaybepossible,butitwillonly

benefiteconomieswiththecapacitytoinnovate.Inthiscontext,itonlyappliesto

middleincomeeconomieswiththeavailableinfrastructuretofacilitate

technologytransfer.ForthepoorestLDCstherewillbenoincreaseindomestic

innovation(Maskus2001a).Fortheemergingeconomiesthebenefitsfrom

increasedinnovationmayservetocountertheincreasedmonopolydistortionto

acertaindegree.Giventheshortageoftechnologicalinputsinthesemarketsthe

gainsareexpectedtobefew.Thustheincreaseineconomicrentswillmostlikely

outweighanybenefittodomesticinnovation.

TechnologyTransferandInnovation

Article7statesthatTRIPSwillassistinthefacilitationoftechnologytransfer.This

relationshipbetweenIPRsandtechnologytransferisoftenoverstatedbyTRIPS

advocates.Adichotomyispresentedthatreliesonthefallacythattheabsenceof

TRIPSmeanstheabsenceofIPRs(Panagariya1999).Inthepreviouschapteritwas

outlinedhowIPRScanassisttradeanddevelopmentgivencertainconstraints.

Briefly,IPRs(versusno-IPRs)areacontributingfactortoaneconomyslevelof

domesticinnovation,technologytransfer,tradeflowsandlong-termgrowth

prospects.However,thegainsfromIPRprotectionarenotuniversalandtheimplementationofanIPRsystemisnoguarantorofeitherforeigndirect

investment(FDI)oreconomicgrowth(Maskus2005).Ifsucharelationshipdid

existthendevelopingnationswouldbeinstitutinganIPRsystemwithoutthe

insistenceoftheWTO.Itwouldbemorepragmatictoarguethatnationsshould

investinthedevelopmentoftheirhumancapital,politicalstabilityandjuridical

strengthbeforeIPRprotectionisconsidered.

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Technologytransferhasasignificantdevelopmentcomponent,inthatan

economymustpossesstheinfrastructuretoabsorbthebenefitsofFDIinorderto

benefitfromadditionalIPRs.Furthermore,FDIbyforeignfirmsisnotsolely

reliantontheexistenceofIPRS.Thereareaseriesofothermoreimportantfactorsthatcontributetotheassessmentofthedomesticbusinessclimate37.

Consideringthat,Maskus(2005)notesthatifIPRswereasimportanttofirms

entrydecisionsasitisoftenassertedthentherewouldbenoticeableincreasein

recentinvestmentinSub-SaharanAfricawhereIPRsystemshavebeenradically

strengthened.Thishasnotoccurred.Also,priortothererecognitionofTRIPS,the

brazenabuseofIPRsdidnotpreventsignificantU.S.basedFDIinflowsintoChina

andtheAsianTigereconomies.GenerallyspeakingtheliteraturefindsthatIPRs

formpartofafirmsdecisiontoinvest,butthisvariesbyindustry.Inasurveyof

firmsMansfield(1994)foundthatthepharmaceuticalandchemicalindustries

werethemostsensitivetoIPRprotectionregardingFDIdecisions.Thisisnot

unsurprising,giventhatproductsintheseindustriesarerelativelyeasyto

imitate.Ratherthanfosteringtechnologytransfer,somehavesuggestedthatby

preventingtheflowofinformation,thatTRIPSitmayinfactbepreventingit

(DrahosandBraithwaite2002).

Absoluteandopportunitycosts

Therearebothtangibleandopportunitycoststhatarisefromthe

implementationofTRIPSprovisions.Directcostsincludetheestablishmentand

administrationofanIPRsystemandtheincreaseinrenttransferstoIPR-holders

thatfollows.Consideringthescarcityofsuchresourcesindevelopingnations,

theincurredcostsaresignificant.

Administrativecosts

Administrativecostsaretheprimaryfixedcostsincurredwiththereformofan

IPRsystem.Forresourcepoornationswithlimitedexistinginfrastructurethese

includehumanresources(HR)trainingandwagebills(patentexaminers,judges,

counsel),legalreformandlegislation,enforcementinfrastructure(establishing

37AlthoughinsomeIPR-intensivesectorsitmaybeahigherprioritythanotherse.g.pharmaceuticals.

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patentoffices,courts,trainingcustomsofficers,enforcementcosts)(Barton,

Alexanderetal.2002).Notonlyarethereinitialstart-upcoststoconsiderbut

alsotheongoingcostonmaintainingasystemisanadditionalconsideration

(Maskus2001a).AcoupleofstudieshavesoughttoestimatethecostofimplementingTRIPSinaseriesofcountries,theirresultsaresummarisedinTable

3.1.

Table3.1:CostsofImplementingTRIPSprovisionsinselectedcountries(millionsof$USD)

Country ScopeofexpenditureFixedcosts

Recurrentcostsp.a.

Bangladesh Administrationreform,Legalreform,Enforcement

0.25 1.1

Brazil HRtraining,Administrationreform,Informationdissemination

4.0 --

Chile HRtraining,Administrationreform,Legalreform,Enforcement

0.718 0.837

Egypt HRtraining,Administrationreform,Enforcement

0.79 1

Indonesia HRtraining,Administrationreform,Legalreform 14.7 --

India Legalreform,Computerisation 6.23 --

Mexico HRtraining,Administrationreform,Computerisation,Enforcement

32.1 --

Tanzania Administrationreform,Legalreform,Enforcement

1-1.5 --

Source:UNCTAD(1996)&FingerandSchuler(1999)

FromTable3.1itisevidentthattheresultsvarysignificantly.Initialcostsrange

from$US250,000forthedraftingoflegislationinBangladeshto$US32million

forextensivereformstoMexicosIPRinfrastructure.TheUNCTAD(1996)

evaluationconcludedthattheexpenditurerequiredwasafunctionofthestatus

ofthecurrentinstitutionsandthenationslevelofdevelopment.Maskus

(2001a)interpretationofthedatasuggestsamedianfigureof$US1.1millionfor

thecostsofjudicialreformand$US1.5-2millionforthetrainingofstaff.Finger

andSchulers(1999)analysisofWorldBankprojectsrevealsthatthetrue

expendituremaybesignificantlygreater.

TherearealsosubstantialopportunitycostsarisingfromtheestablishmentofIPR

infrastructure.BydirectingscarceresourcestowardIPRreformitfollowsthat

otherpolicyprioritiesinhealth,educationandinfrastructurewillfaceincreased

restrictions(Barton,Alexanderetal.2002).Recognisingthis,theWTO,WIPOand

USAID

haveofferedtechnicalassistanceforthedevelopmentofnationalIPR

systems(Maskus2001a).However,theavailableresourcesarelimitedin

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relationtocountryneeds,anditisnotrepresentativeofthetruecostof

maintainingsuchasystem.Theemploymentofadministrators,counseland

judgesincursasignificantopportunitycostforLDCsthatarealreadysuffering

fromskillsshortagesinthesesectors(Maskus2001a).Thisdistortionofprioritieshasthepotentialforsignificantflow-oneffectstoemerge.Forexample,

thegainstothepoorfromtheprotectionoftangiblepropertyrightsin

developingnationsaretheoreticallygreaterthanthebenefitsfromIPRs.Yet,

becauseTRIPSdictatesthatIPRreformismoreimportant,itsidelinesactual

prioritiesresultinginadecreaseinsocialwelfare.

Renttransfers

In2006,thePhilippinesissued1053patents,ofthosemerely38(3.6%)were

issuedtoresidents(WIPO2008).Likewise,inMexicolocalsregisteredonly135

ofthe1089patentsgrantedinthesameyear(WIPO2008).AsFigure3.1

indicates,patentsregisteredindevelopingcountriesarepredominantly

registeredtoforeignowners.Theoretically,asaneconomygrowsthisratiowill

graduallychange(Fink2001).Figure3.1chartsSouthKoreasincreasinglocal

ownershipofitspatentregime,from15.4%(1985)to73.9%(2006)(WIPO

2008).EconomictheoryholdsthatthedevelopmentofanIPR-systemwillspur

innovationbylocalsasproducersseekprotectionfortheirinventions.Thismay

resultinamarginalredressofthecurrentpatentratiointhelongrun.From

SouthKoreasexperience,ittakesconsiderabletimetoachieve,andthiswas

fromanationstartingfromasolidindustrialbase.IntheLDCsalmostnopatents

areissuedtolocalproducers38andthereisnotindicationthatthiswillnot

changeintheshortterm.Thus,foreignerswillcontinuetoownthemajorityof

IPRsinthedevelopingworld.

38Forexamplebetween1985-2006inNepal15patentswereapprovedforwhichonly3werelocallyheld(WIPO2008).

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USA

Germany

Japan

France

UK

Switzerland

Australia

Netherlands

Ireland

So

uthAfrica

Portugal

Brazil

Canada

India

New

Zealand

Mexico

Israel

Spain

C

hina

Greece

S.

Korea

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

000

,000(millions)of2000$USD

0

10

20

30

40

50

60

70

Percentage(%)ofpatentsissuedtoresidents

Chile Egypt India Mexico Philippines S.Korea

Figure3.1:Percentageofpatentsissuedtoresidentsinsampleof6countries(1985-2006)39

Asmostofthepatentsissuedindevelopingnationsaregrantedtoproducersin

HICs,TRIPSimpliesthatIPR-importingcountrieswillbecompelledtopay

increasedrentsforeignIPRholders.AWorldBankstudydocumentedbyMaskus

(2001a)evaluatedtheimpactofTRIPSontheflowofstaticpatentrentstohome

firms40.ItsresultsaregraphicallyrepresentedinFigures3.2and3.3.

Figure3.2:ProjectedchangeinstaticpatentrentsfromimplementationoftheTRIPSagreementfor21selectedcountries41

Figure3.2showsthatUnitedStatesbasedfirmswouldaccruethegreatest

additionalpatentrentsfromTRIPS,$US19.1billionperannum.AdditionalIPR-

39DataSource:WIPO(2008)

40TheresultsofthisstudyplussomeadditionalcalculationsareincludedinTableA2.1intheappendix.41DataSource:Maskus(2001a)

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B

razil

M

exico

Indonesia

Colombia

Chile

Argentina

China

Panama

SouthKorea

India

Portugal

Greece

SouthAfrica

Israel

NewZealand

Switzerland

Ireland

Australia

Spain

Germany

UK

Netherlands

Canada

Japan

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

000,0

00(millions)of2000$USD

exportersGermany,Japan,France,UK,Switzerland,Australiaetal.wouldalso

gainrents.AttheotherendofthescaleSouthKoreawouldlose$15.3billionin

outwardrentsannually.ClearlyIPR-exportersinHICarethewinners,with

technologyconsumersinIPR-importingcountriesforcedtopayadditionalrents.Itshouldbenotedthatthesefiguresarestaticandonlystatewhatadditional

rentswillbeearnedon1995levelsofpatentstock.However,theydoshowthat

TRIPSwillcauseasignificantchangeintheincomeearnedfrompatentrents

(Maskus2001a).

Figure3.3.ProjectedchangeinstaticflowsofUS-basedFDIfromimplementationoftheTRIPSagreementfor24selectedcountries42

Article3ofTRIPSstatesthatWTOmemberswillbenefitfromincreasedtechnology

transferanddissemination(WTO1994).Asoutlinedinthepreviouschapter,one

ofthekeymechanismsfortechnologytransferisFDI.Maskus(2001a)World

BankstudyalsocalculatedtheprojectedgainsinFDIfromTRIPSimplementation.

ThestaticgainsaredepictedinFigure3.3.Initialobservationsrevealthatthe

gainsfrominwardFDIaresignificantlylessthanoutgoingpatentrents.SomecountrieslikeBrazilwillexperienceasignificantlevelofadditionalFDIthatwill

outweighthecostsofadditionalrents.Othercountrieswillnotexperiencethe

samenetbenefit.TheyaredepictedinTable3.243.

42DataSource:Maskus(2001a)43TableA3.2displaysthefullresultsinAppendixB.

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Table3.2:NationswithadeficitbetweenadditionalpatentrentsandFDIaccruedthroughTRIPSimplementation(millionsof2000$USD)

Country Netdifference

SouthKorea -15,063Greece -7,695Spain -5,057China -4,434Israel -3,873Canada -2,970NewZealand -2,287Netherlands -1,262India -764Ireland -249Portugal -185DataSource:Maskus(2001a)

Becausetheresultsarestaticthelossesmayinfactbeoverorunderestimated.

Howeverthepointremainsthatalthoughthereisapotentialbenefitintheform

ofadditionalFDI,itmaynotoutweighthecostsofadditionalpatentrents.

Interestingly,theseconclusionsmimicthetheoreticalambiguitysurroundingthe

welfareeffectsofpatentsdiscussedinthepreviouschapter.

TraditionalKnowledge

WiththeimplementationofTRIPSprovisions,ithasbeenarguedthatlocalproducerswillbespurredtoinnovateandpotentiallyevengainpatentrents

fromtheirtraditionalknowledge.Yetascoveredpreviously,theamountof

innovationinthepoorestcountrieswillbeeasilyoffsetbytheincreaseinpatent

rents.Moreover,theroleofTRIPSinprotectingtraditionalknowledgeishighly

contested(Brand2005).Theoretically,developingcountriescouldgainfrom

patentingtheirtraditionalknowledge,butinrealityfewpossesstheabilityto

utiliseanIPRsystemfortheirbenefit(Stiglitz2006).Furthermore,inmanycasestheexistingIPRstructureneedstobemodifiedtomanageinformationheldby

communities.Asalwaysthereareopportunitycostsinvolved,especially

consideringthatpatentinganationsstockoftraditionalknowledgerequiresa

significantinvestmentinlegalfeesandtime44.

44Italsoraisesproblemsfordevelopingcountriesoverownershipofthisknowledge.Whoownsthepatenttoatraditionalmedicinethathasbeenwidelyusedforasignificantperiodoftime?Whatifthesocietyhasnoconceptofowninganidea?

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Conclusion

Fromtheargumentspresentedinthischapter,itcouldbeconcludedthat

intellectualpropertyrightshavenolegitimateplaceinatradeagreement.Asthis

chapterhasoutlinedTRIPSsetsadangerousprecedentbyincludingnon-trade

issuesinatradeforum.AttemptsbyTRIPSadvocatestodressintellectual

propertyasadevelopmentissuehavenotbeensupportedbyanypositive

findings.InsteadavastbodyofevidencesuggeststhatTRIPShasadetrimental

welfareeffectondevelopingcountries.

Increasedpatentprotectionexpandsthewelfarelossfrommonopolyand

increasesthepriceofhigh-technologyproducts.Thesuggestedgainsfromlocal

innovationhavebeenoffsetbytheincreaseineconomicrentsthatconsumers

mustsacrificetoforeignIPR-holders.Moreover,thepromiseoftechnology

transferwasnotbasedonanyempiricalevidenceandhasfailedtomaterialise.

Finallythecostsofimplementationhavedistortedlocalprioritiesandrepresent

asignificantopportunitycostforeconomiesthathavefarmoreimportantissues

tofocustheirresourceson.Thischapterbrieflytoucheduponthesocialcostsof

TRIPSintheformofthelossoftraditionalknowledge.Thenextchapterwill

introducethechallengesfacingpublichealthinthedevelopingworldandthe

implicationsforitfromTRIPS.

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PublicHealthPriorities&BarrierstoAccess

ByextendinguniversalpatentprotectionthroughtheTRIPSagreementtheWTO

hasbeencriticisedbydevelopingnations,developmentagencies,NGOsandpublic

healthadvocatesforplacingpatentsbeforepatients('tHoen2002;Mayne

2004;Orbinski2008).Thisviewpointemergedfromthebeliefthatpatent

protectionwillprohibittheimportationofcheapgenericproductsandforce

developingnationstopurchasehigherpricedoriginatordrugs.Thischapterwill

outlinethepublichealthconsequencesofthispolicy.Itbeginsbyexamining

healthasadevelopmentissuebydiscussingtherelationshipbetweenhealth,

economicgrowthandpoverty.Thesecondpartexaminesthechallengeposedby

communicablediseaseondevelopingcountriesandthisflowsintothenext

section,whichoutlinesthechallengesoftheHIVepidemic-withspecificreference

tosub-SaharanAfrica.Thefinalpartexaminestheroleofpharmaceutical

provisionasanessentialcomponentofthehealthsystem.

Health,Development&Poverty

Healthasapriority

Unaccompanied,focusingonimprovinghealthisconsideredapriorityataglobal

level(WHO1978).Indevelopedcountries,governmentsexpendasignificant

proportionoftheirbudgetsmaintainingpublichealthcareprogrammesof

variousshapesandsizes(Harvey,Faunceetal.2004).Unabletoafforda

westernstylepublicfinancingofhealthservices,theWorldHealthOrganization

(WHO)wasestablishedtoassistdevelopingnationswiththetechnicalexpertise

todevelopprioritiesandimplementsuitableprogrammes(WHO2003).Despite

this,inthepasthealth(alongwitheducation)hasbeenviewedasasoftpriority

bydevelopmentplanners.Consequently,intheeventofafiscalcrisis,developing

nationswereoftenadvisedbybodiessuchastheInternationalMonetaryFund

(IMF)andWorldBanktolimitspendingonsoftexpendituresinordertofocus

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Healthisnotonlyanessentialinputforeconomicgrowthitisalsounlikelythatit

willoccurwithoutit.TheCommissiononMacroeconomicsandHealthfoundthat

theeconomiccostsofinfectiousdiseaseplaceasignificantburdenonan

economy,lowproductivityreducesreturnsfromlabour,whichinturnaffectstheearningcapacityofitscitizens(Sachs2001).Therefore,thepoorerandsickera

countryis,thegreaterthiseffectismultiplied.FortheLDCstheopportunitycost

ofdiseaserunsintohundredsofbillionsofdollarsperyear(Sachs2001).In

addition,theevidencesuggeststhatwithindevelopingcountriestheburdenof

diseaseisbornebythepoorestmembersofsociety.

Theviciouscycleofpoverty

Withindevelopingcountries,thereisasignificantgapinhealthoutcomes

betweenhighandlowincomegroups,withtheburdenofdisease

disproportionatelybornebythepoor(Gwatkin2000a;2000b).Thisfollows

logicallyasthepoorareparticularlysusceptibletoinfectiousdiseasesasaresult

oflimitedaccesstocleanwaterandsanitation,medicalservices,adequate

shelterandhealthinformation.Thusitappearsthatdestitutionisacausative

factorofmorbidity.Wagstaff(2002)elucidatesthatthisrelationshiprunsinboth

directions,inthatpovertyactsasacauseofillhealthandillhealthisa

contributoryfactorofpoverty(seeFigure4.1).Insupportofthefirst

proposition,theevidencesuggeststhatlimitedaccesstoappropriateservicesisa

barriertohealth.PritchettandSummers(1996)foundthatthemainbarrierto

accesswaslimitedfunds.Moreover,amongstthepoorillhealthisoften

associatedwithsubstantialout-of-pocketexpendituresanddebt.Asthepoorare

particularlypricesensitivemanywillabstainfromseekingmedicaltreatment,in

thelongrunthiscanleadtoevengreatermorbidity(Narayan,Pateletal.2000).

Insupportofthepropositionthatillnessisacausativefactorofpoverty,Bloom

andSachs(1998)foundthatbothmorbidityandhighfertilityplacedownward

pressureonhouseholdincome.TheWorldBank(2000)concursandadditionally

arguesthatthestrainoftheseadditionalexpenditurescandeterminethe

povertystatusofahousehold.Thesefindingsaretobeexpectedaslimited

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November2008 54

Level1:TheAgeofPestilence&Famine

LE:20-40years(highlyvariable)UnsustainedpopulationgrowthPoorhygieneandnutritionVerylowsocialandeconomicdevelopmentMalnutritionandinfectiousdiseaseleadingcauseofmorbidityandmortality

Level2:TheAgeofRecedingPandemics

LE:30-50yearsSustainedpopulationgrowthImprovinghygieneanddietDeve