8:10 AM Jul 3, 1995
SOCIAL COSTS OF NEW PATENT RULES
by Carlos M. Correa* Buenos Aires June (TWN) -- Western media have welcomed the outcome of the Uruguay Round as a triumph of free trade. People from all over the world is supposed to benefit from the new freedom brought about by the defeat of protectionism by multinational corporations. Paradoxically, in the area of technology, including vital elements for human health, the Uruguay Round does not bring more freedom, but monopoly. The Agreement on Trade-Related Aspects of Intellectual Property Rights (the "TRIPs Agreement") does, in effect, contain a number of provisions that * extend patent rights over pharmaceutical products worldwide, * make microorganisms patentable * increase the duration of patent protection (to 20 years from application), * consider importation as equivalent to local working of an invention, * strengthen the rights of patent-holders, particularly with respect to process patents, and * provide indefinite protection for secret technologies. Are there global benefits from this? The TRIPs Agreement consolidates a new form of protectionism, which is not exercised through tariffs but through the appropriation of the knowledge used to produce goods and services. This highest expression of protectionism is, in the view of developed countries, a necessary condition to promote innovation and to stimulate technology and capital flows to developing countries. The assumption is that people from developed and developing countries will benefit alike from intellectual property rights. In the first place, the rationale of conferring monopoly rights over knowledge is in itself questionable. Knowledge can be used by everyone at once and, therefore; many may benefit from its use concurrently. It makes sense for society, as noted by Prof. Ned Hettinger ('Owning varieties of life: Historical, conceptual and ethical dimensions, Center for Biotechnology and Ethics, Texas A&M University', 1992), to grant exclusive rights to tangible objects because by its very nature the use by one person requires excluding others. But this is not the case of a "public good" like knowledge. Second, it remains unproven that a reinforced and expanded protection on intellectual property rights worldwide, shall increase the flows of technology and capital to developing countries. On the contrary, UN studies ('Intellectual property rights and foreign direct investment', UN, 1993) suggest that innovatory companies in the North will increasingly opt, in the new post-Uruguay scenario, to directly sell the products or services that incorporate the innovations, rather than transferring the technology through foreign direct investments and licensing agreements. The likely result will be more exports by developed countries, and less opportunities for industrial and technological development for developing countries. A recent econometric study indicates, in this regard, a substantial increase in US exports to countries where intellectual property protection has been strengthened (Pamela Smith, 1995, "International patent protection and United States exports: evidence in the data", papers presented at international conference at American University). Third, it is in the logic of monopoly to charge as a high price as the market can bear, with the purpose of maximizing profits. Price increases, as discussed below, will be a regular feature, and not an accident, in the new regulatory framework. Finally, increased profits neither necessarily means more private R&D, nor a lower contribution by the public to technological development. Prof. James Love, (Presentation at ALIFAR International Conference, Bariloche, May 1994). has demonstrated that 12 out of 17 significant drugs developed in the United States between 1987 and 1991 were obtained with important government funding, and that these drugs were much more expensive (median cost of $4.854) than those developed without such funding (median cost of $ 1.626). The social implications and costs of changes in intellectual property legislations of developing countries, was never considered a relevant issue by the governments of developed countries and the powerful industrial lobbies (such as the US pharmaceutical industry) which forced those changes. Such costs, however, are likely to be substantial. This is well illustrated by several studies on the case of medicines: * After the introduction of pharmaceutical product patents in Italy (in 1979), the prices of medicines increased on average more than 200%, i.e. consumer suffered a net welfare loss (Challu, 1991a). * According to a World Bank's economist (Julio Nogues, 1990, 'Social costs and benefits of introducing patent protection to pharmaceutical drugs in developing countries') the minimum welfare loss to a sample of developing countries (Argentina, Brazil, India, Mexico, Korea, and Taiwan) would amount to a minimum of US$3.5 billion and a maximum of US$10.8 billion, while the income gains by foreign patent owners would be between US$2.1 billion and US$14.4 billion. * A "national health disaster" has been anticipated by the Indian Drug Manufacturers' Association as a result of the implementation of the TRIPs Agreement in the country, where only 30% of the population can afford modern medicines in spite of the fact that drug prices in India are one of the lowest in the world. Comparisons of prices of drugs between India and countries where patent protection exists, indicate that in some cases they are up to 41 times costlier in countries with patent protection (National Working Group on Patent Laws, 1993). * Similarly, the IMF economist Arvind Subramaniam ('Putting some numbers on the TRIPs pharmaceutical debate', forthcoming in Technology Management) noted that drug prices in Malaysia, where patent protection existed, were from 20% to 760% higher than in India, which reflected a profit-maximising behaviour based on "what the market can bear". * A study conducted in Argentina (Pablo Challu, 1991, "Repercussions del patentamiento monopolico en Italia", Revista del Derecho Industrial, Vol, 13, No. 39) estimated that the introduction of product pharmaceutical patents in the country would imply an annual additional expenditure of US$194 million with a reduction of 45.5% in the consumption of medicines, as a result of a price increase of around 270%. The increase in remittances of foreign firms abroad would reach US$367 million. Fiscal expenditures would also increase around US$200 million annually in order not to affect the current public health level. Substantial consumer welfare losses and the exclusion of a larger proportion of the population from the market of modern medicines, are some of the costs to be borne by developing countries forced to adopt new patent protection for pharmaceuticals. Economic gains by large industrial firms has been privileged over the health and life expectancy of millions of persons. No mechanism to mitigate these social implications has been discussed within GATT. What can developing countries do to cope with the just referred social and economic costs? There are, a few aspects in the TRIPs Agreement that may permit developing countries to act on the matter. In the first place, developing countries should fully take advantage of the transitional period that is conferred to them for the implementation of the new rules, which extends for up to ten years for pharmaceutical and agrochemical products. Secondly, the TRIPs Agreement explicitly allows the establishment of compulsory licenses without limiting the grounds therefor. An effective system of this type should be established, including the granting of compulsory licenses where health reasons are at stake, where a license is unreasonably refused to a local firm, or where other anti-competitive practices by title-holders are identified. Thirdly, parallel imports - imports of patented products which have been legitimately put on the market abroad -should be allowed, under the principle on "international exhaustion of rights" (Art. 6 of the TRIPs Agreement). Fourthly, revocation should be provided for to remedy cases of abuses, without prejudice to the right to a judicial review of the decision upon request of the title-holder. Fifthly, developing countries which are bound to adopt the new patent rules should cooperate in the implementation of the TRIPs Agreement, and in the design and execution of social policies and measures to ensure access by the population to medicines. It should be noted that with the introduction of pharmaceutical patent protection, States will be required to make a larger effort than before to maintain acceptable levels of public health. Developing countries have waived a substantial part of their sovereign rights to design their intellectual property systems. The adoption of the Uruguay standards is likely to affect many aspects of industrial and economic development. Important social costs are also foreseeable. There is, however, some room for national legislation and practices to implement the TRIPs Agreement in a way that reduces its negative impact so as to reestablish public health as a national priority. (* Carlos Correa was a former Argentine negotiator on IPRs at GATT and WIPO, and is now at the University of Buenos Aires)