with Prabhash Ranjan
First published in The Business Standard on July 23, 2005
When the heads of the earth’s most powerful countries met at the G8 summit in Gleneagles, Scotland earlier this month, there was no shortage of prose to underscore the importance of trade for development, particularly for the least developed nations of Africa. Less than a week later, when trade ministers from 30 World Trade Organisation (WTO) member countries, including those from the G8, met at Galian, China to accelerate the pace of negotiations under the Doha Round, progress was agonisingly slow. The Mini-Ministerial meeting that got over on 13th July was, it seems, let down as always by the perennial slip between the cup of wishful hopes and the lip of harsh realities of the negotiating process.
If trade is to help make poverty history, then agriculture is the area where progress needs to be made urgently, as more than two-thirds of the people living below poverty work on farms in the developing world. The meeting disappointed, although a fresh proposal from the Group of 20 (G20) countries to provide ‘the basis for further talks on methodology to cut tariffs in agriculture’, provides a ray of hope. What does this offer in bridging the yawning gap between developed and developing countries on the methodology of agricultural tariff reduction and does it safeguard the interests of the Southern countries adequately?
Based on the tiered approach given in the July Package for tariff reduction, G20 has proposed that the tariff rates of developed countries be divided in five bands and that of developing countries into four bands and then tariffs within each band be subjected to linear cuts. (More bands for developed countries, simply because they have a higher variance between maximum and minimum tariff rates for different products.) Higher tariff bands will then be subject to greater linear cuts in order to meet the target of high tariff reduction, as warranted by the Doha mandate and the July package. Further, the proposal states that the tariff reduction by developing countries would be less than two-third of the reduction undertaken by developed countries. This proposal of G20 is significant as it is the first attempt to operationalise the tiered approach for reducing the agricultural tariffs. Initial reports emanating from Dalian suggested that EC and US favour this proposal although the Cairns group countries such as Australia and Switzerland were against it.
In protecting the interests of the developing countries that G20 represents, two premises are important. Firstly, developing countries have a defensive interest in protecting their vulnerable farm economies. Any tariff-cutting exercise should not impose an undue burden on them to drastically reduce their tariff rates and bear the adjustment costs. Secondly, tariff-cutting exercise should lead to substantial improvement in market access for developing countries by steeply cutting the tariff rates in developed countries. In other words, from a developing country perspective, any tariff cutting methodology should be soft on developing countries and hard on the tariffs of developed countries. The negotiating issue would then be the degree of softness and hardness of the tariff cutting methodology.
The G20 proposal meets the defensive interests of developing countries well. By proposing a linear approach for developing countries, the proposal ensures that the tariff cutting exercise would be soft on developing countries. For instance, for a country like India that has an average bound tariff rate of 116 percent in agriculture and maintains a bound tariff rate of 100 percent or more on 536 products out of 671 products (HS 6 digit level), a linear approach for tariff reduction is an appropriate way forward in the tariff cutting exercise.
However, the G20 proposal falters on the latter issue of substantially improving market access for developing countries. Developing countries face formidable tariff barriers in developed countries in the form of tariff escalation. For instance, in Japan, the bound tariff rate on raw sugar is 224 percent and this climbs to as high as 328 percent for refined sugar. Canada levies 9 percent on raw sugar and 107 percent on refined sugar. The respective bound tariff rates for raw and refined sugar in EU are 135 per cent and 161 percent respectively. The story is the same if one looks at the tariff rates on cocoa beans vis-à-vis chocolate or fresh orange vis-à-vis orange juice. The net effect of these differential tariffs on raw and processed commodities is that it is difficult for developing countries to move up the chain of value addition. The G20 proposal that advocates a linear approach would lead to less reduction in tariffs as compared to the non-linear Swiss formula. It should instead have called for developed countries to undertake steep reduction in their tariff structures by adopting a non-linear approach embodied in the Swiss formula within the five bands.
The G20 submission also proposes the maximum tariff limit to be capped at 100 percent for any individual product in developed countries. This high tariff cap is rather generous of the G20, considering the fact that developed countries such as Japan, EU and the US have 579, 85 and 45 products respectively, that have bound tariff rates equal to or more than 100 percent.
One must not ignore the importance of the G20 proposal in breaking the impasse and bridging the divide between the developed and developing countries on the tariff reduction formula. Nevertheless, it is pertinent to ponder the cost that such an agreement imposes on the developing countries that have a lot at stake and too few good cards to play with. In the negotiations ahead, US, EU and other developed nations will no doubt demand, and perhaps secure milder cuts and higher tariff caps. It could be interpreted that the G20 proposal is closer to the ‘fallback position’ rather than the ‘negotiating position’ for developing countries. Further, there are indications to suggest that if developed countries do agree to this G20 proposal, they could ask developing countries for concessions in other areas of trade negotiations such as industrial products, where India is already in a tight spot on the issue of tariff reduction methodology.
No doubt, the present round of negotiations is an opportunity for developing countries to negotiate and bargain for greater and deeper cuts in the tariff rates in developed countries. Missing this opportunity will only postpone the reforms in agricultural trade much to the detriment of the farmers in the South and progress has so far been slow. As Celine Charveriat of Oxfam puts it candidly, at the current rate, countries would not even have agreed on the seating plan, let alone a framework for agricultural reform by the time the WTO Ministerial Meeting happens in December 2005!
However, the G20 should not press for an agreement at any cost, as having no agreement is always better than a bad agreement. At Cancun in 2003, the G20 had demonstrated its resolve in wrecking the talks rather than accepting a negative agreement. Developing countries have to be vigilant to ensure that unlike in the Uruguay Round, the Doha Round leads to a balanced outcome. Better an agreement about the seating plan on the deck of a sinking ship than on a ship sailing into the past.
Friday, 2 January 2009
Patently in National Interests?
First published in the first issue of Trading Up in April 2005
In 1977, Donald Smith and his father, Frank Smith, of Orlando, Florida secured the US Patent No. 4,022,227 for a hairstyle that would enable ‘patients’ with partial baldness to cover their pate by growing hair longer on the sides and combing it over. While the prevalence of this patently unflattering ‘combover’ style precedes the Smiths’ patent, its popularity has remained unabated to this day. The Smiths have, however, failed to garner even a dime through royalty, despite the sanction of the law. An Ig Nobel Prize for absurd and improbable research in 2004, with no monetary benefits, is the biggest reward they have yet got for their thought.
Not all frivolous patents go unrewarded. When such patents are in the realm of medicines and have a public health implication, then the reward for the patent holder can be at considerable costs to the larger public good. India has been the key protagonist of a long-drawn-out drama, to set in place a national patent regime that provides incentives for research and development (R&D), prevents abuse of patents and protects public interests (public health in particular) while meeting its international obligations under the Trade Related Intellectual Property Rights (TRIPS) Agreement. A stage show, that has had global and national audiences and actors comprising civil society groups, national and multinational pharmaceutical firms, least developed, developing and developed country governments; economists, lawyers and lawmakers.
From a simplistic and narrow pharmaceutical perspective, instituting a patent regime that is compliant with the TRIPS Agreement, required repealing the controversial feature of the Indian Patents Act 1970 that enabled process patents whereby domestic firms could develop generic copies of patented drugs by following a different manufacturing process. This needed to be replaced with a system that allowed product patents with 20-year validity for pharmaceutical products. Successive amendments of the Act in 1999 and 2002, an Ordinance in 2004 and the recent Amendment Bill in March 2005 have all been key milestones on the route to compliance. While campaigners for access to cheaper medicines express disappointment at amendments that exceed the requirements of the TRIPS Agreement, coalition equations and rediscovery of ‘national interests’ by political parties paved way for a final bill that was not as excessive as it could have been.
Several questions abound about the efficacy and impact of the new law. Is it all good and does it reflect a consensus of national interests, as the government believes? Will it be able to ensure affordable drugs and treatment in a country where the per capita health expenditure was as low as US$ 22 in 1998? Will the current Bill improve access to more effective treatments and drugs for diseases prevalent in India? Can the domestic industry cope with the opportunities and challenges that will arise?
Some Good, Mostly Bad?
Indeed, there are many broad positives in the new bill. Pre-grant opposition that would enable a member of public to challenge a patent application before it is granted has been restored. The process of issuing a compulsory licence (CL), that will enable the government to authorise a third party to produce a patented drug in the event of a national emergency (for example a plague epidemic) has been sped up. Further, exports to countries with inadequate manufacturing capacities are also permitted under CL. The bill also provides a measure of immunity to producers of generic versions of drugs that have application pending in the mailbox from excessive royalty demands and litigation.
However, considerable ambiguities that could dilute the gains persist. Firstly, what can be patented (scope of patentability) under Section 2 of the Bill that accepts ‘inventive step’ as a feature that involves technological advance, economic significance or both, opens up possibilities for pharmaceutical firms to file patents for marginal improvements on known molecules or by merely citing economic potential. Not specifying pharmaceutical substance as a new ‘chemical’ entity could allow formulations, isomers and other incrementally modified drugs to be considered as new inventions. If one views the 8926 mailbox applications for patents that the Indian Patent Office received during 1999-2004 against the 274 new chemical entities that the US Federal Drug Administration approved during 1995-2004, it would be naive to conclude that we are in the midst of a pharmaceutical revolution. Evergreening of patents to extend monopoly rights by citing trivial advances, therefore, still remains a possibility.
Secondly, while the Bill allows for public and interested parties to oppose patents before they are granted, it is unclear whether challengers to patent applications will have access to all relevant information. What is clear, however, is that the controller of patents has the final say and contestants will have no room for appeal at the pre-grant stage.
Thirdly, producers of generic versions of new drugs in the mailbox can continue to produce them even after grant of patent, if they were producing them before 1st January 2005. These generic manufacturers who have made ‘significant investment’ will however, have to pay a ‘reasonable royalty’. The subjectivity over ‘significant investment’ and ‘reasonable royalty’ opens them for interpretation. Besides, where a web of patents (patent thickets) covers a single pharmaceutical product, the prohibitive cumulative royalty that the generic producer might end up paying could make drugs frightfully expensive.
Fourthly, the Bill stipulates that applications for CL will be considered only three years after the grant of a patent. When better drugs that can save lives exist, the issuance of compulsory licences to ensure availability and affordability should have been weighed by public health concerns, albeit with justifiable royalties to the patent holders.
The Bill assigns considerable discretionary powers to the office of the Controller of Patents in framing rules and in deciding on pre-grant opposition. While such powers might enable faster decision-making process, it is worth debating whether the Patents Office has the requisite management, technical and infrastructural capacity to face up to the challenges that the new Bill brings.
A Consensus through Consultations?
Nevertheless, civil society organisations (CSOs), public health campaigners and the domestic pharmaceutical firms have been celebrating the minor gains that moderated the final Bill significantly from the December 2004 Ordinance. In all fairness, the turn of events that swayed the governments to incorporate some of the TRIPS flexibilities was perhaps more a fallout of realpolitik and political realignments than a willingness on the government’s part to listen to civil society and public opinion. This is disconcerting. For one, in a democracy, defining and protecting national interest is not the sole preserve of the government. For all the competence that the government machinery might embody, public sentiments, even if India were insular to the pleas of other developing countries dependent on it for cheap generic drugs, need to be respected.
Besides, popular opinion was not predominantly in favour of India reneging on its commitments, but to operate within the flexibilities that the TRIPS Agreement and Doha Declaration allowed to ensure access to cheaper medicines and drugs. In a country where public health expenditure was 0.9% of the GDP in 2002 (WDR, 2004), 97% of the private expenditure on health is out of the pockets of patients (WHO, 1998), and less than 50% of the population have access to essential drugs or have been immunised (WHO, 1998), public health concerns need to be accommodated sufficiently while defining national interests.
Cheaper Drugs, Better Drugs?
Will the prices of drugs and health care rise? Kamal Nath, Union Minister for Commerce and Industry, has tried to allay fears of galloping drug prices by pointing out that 97% of the drugs are off patent and none of the drugs on the Essential Medicines List are on patents. Estimates of the value of drugs that would get into the product patent regime vary from US$140 million based on the Minister’s figures to US$ 700 million according to the Pharmaceutical Research and Manufacturers Association of America (PhRMA). How much of these estimated values get transferred to the end-customer as a mark-up on price and by when, remains to be seen. India will have to plan ahead to establish a credible and comprehensive mechanism to monitor and enforce affordability and accessibility of essential medicines, once they come under patents. Canada’s Patented Medicines Prices Review Board that exclusively monitors the prices of patented drugs provides a model for emulation.
Will the current Bill improve access to treatment and R&D for new drugs in a largely poor nation with a high incidence of tropical and communicable diseases? Reverse engineering facilitated by the Indian Patents Act 1970 helped create a strong domestic pharmaceutical industry with the capability to develop cheaper generic versions of patented drugs. As a consequence the share of domestic pharmaceutical firms in India increased from 32% in 1968 to 77% in 2003 (UNCTAD, 2004). Although India accounts for only 1.5% of the global pharmaceutical market of US$ 480 billion, it accounts for an estimated 20% of the global consumption (Goldman Sachs, 2004). The difference in value and volume would indicate that Indian firms service the high volume–low priced segment of the market.
Domestic Industry to the Fore?
Can the domestic industry shift from being primarily a producer of cheap generics to a developer of proprietary drugs, new drug delivery systems and new chemical entities? India has several advantages. It has 64 United States Federal Drug Authority approved producing plants, the most outside the US. It has cheaper, yet highly skilled labour, low clinical trial and fixed asset costs. (UNCTAD, 2004) Indian firms, such as Ranbaxy and Dr. Reddy’s are committed to increasing their R&D expenditure to 10% of their revenues from around 7% today (Economist, Sept 2003).
However, these advantages have to be put in perspective. Pfizer’s global R&D expenditure of US$ 7.1 billion is roughly the size of the entire Indian pharmaceutical industry’s domestic and export market. It is estimated that the industry spends up to US$800 million to bring a new molecule to the market (DFID Report “The Effect of Changing Intellectual Property on Pharmaceutical Industry Prospects in India and China”, 2004). Even if money can buy more in India, drug development costs are astronomical. Which is perhaps why domestic firms, namely, Ranbaxy, licenses new discoveries to multinational firms for trial and development (Economist, September 2003). So long as this remains a viable strategy, R&D of these companies might focus on drugs that are relevant to the market of the multinational partner. Observers point out that even if R&D expenditure by Indian firms go up, it is likely to focus on areas where they can make quick money – diseases more prevalent in rich countries, such as cardiac diseases and diabetes. In 1999, only 16% of the R&D expenditure in India was spent on infectious and parasitic diseases prevalent here (DFID, 2004). Product patents will be beneficial to India if it leads to research and development for the supply of new drugs relevant to its disease profile.
For this to happen, Indian firms will have to buck the current trend and invest more in diseases such as AIDS, dengue, malaria and tuberculosis. Current figures are heavily skewed against poor man’s diseases. The Commission on Intellectual Property Rights reported in 2002 that firms tend to spend on drugs that have a market potential of around $1 billion per annum or more, which is not often the scenario for drugs meant for developing country markets. Of the 1223 drugs introduced between 1975 and 1996, only 13 were aimed at tropical diseases. Only US$ 400 million of the US$70 billion spent on health research was spent on research on AIDS and malaria in 1998 (Sudip Chaudari, 2003).
If the product patent regime leads to an era where even Indian domestic firms move on to more lucrative segments of the markets, then the repercussions on public health in the developing world could be catastrophic. Public policy initiatives to address this market failure have to be strengthened. Public-private partnerships, public investment in R&D, providing incentives to private firms for research could be some of the strategies. Bold approaches are also called for. The Institute for OneWorld Health, a US based not-for-profit pharmaceutical company follows an interesting model. It gets owners to donate intellectual property on drugs for diseases with huge public health impact but no market potential (for example, diarrhoea, which kills 2m people a year in developing countries), raises funds from donors and gets researchers to contribute their expertise, mostly for free.
Defining National Interests…
The US Special 301 Report of 2004 states rather unabashedly that the United States will advance its national interests in guaranteeing a higher degree of intellectual property protection through a variety of mechanisms including the negotiation of free trade arrangements and the use of Generalised System of Preferences. If the Indian government were ever to articulate its national interests in such a manner, it would be welcome to see it defining the accessibility and availability of drugs to millions of poor in India and elsewhere as one of the key guiding principles while administering the new patent regime. A patent regime that ensures access to new drugs for diseases prevalent here at affordable prices. And keeps innovative hairstyles and frivolous patents out.
Fair Trade: For Better or Worse?
(Published in The Business Standard on 10th May 2005)
In 2003, the United States exported 3.8 million tonnes of rice, making it the third largest exporter in the world, trailing only behind Thailand and Vietnam. This is despite the fact that it costs twice as much in the US to grow rice than it does in the other two countries. Such sterling export performance has been aided by the US$ 1.3 billion (72% of the total cost) that the American rice farmers got as subsidies in 2003! (Oxfam Briefing Paper 72: Kicking Down the Door, 2005)
Not all countries can afford to bankroll their way to a comparative advantage in trade, especially when there is none. Certainly, not the developing countries. The dictum of classical economic theory where trade specialisation takes place according to comparative advantages is out of operation in a trading architecture riddled by trade distorting domestic support and high tariff boundaries. Will free trade that removes these distortions especially in developed countries, restore comparative advantages of developing countries in agricultural commodities, increase their export earnings, boost wages of their unskilled labour and stimulate economic growth in general?
Arvind Panagariya of Columbia University, thinks otherwise. His conclusions are born out of the fact that most of the least developed countries (LDCs) are net importers of agricultural commodities – 45 of the 49 LDCs import more food than they export. In his paper, ‘Agricultural Liberalisation and the Developing Countries: Debunking the Fallacies’ (2004), he contents that if subsidies are removed, the net importers of food will end up paying more for food. This loss will not be offset, unless they can become sufficiently large net exporters. Cut in rich country subsidies will therefore benefit only big agricultural exporters such as Brazil and Argentina, while most LDCs will be worse off than they were before. Although his arguments are not backed by substantive empirical analyses, some other studies estimate that larger countries will benefit, while smaller countries in the same regions will suffer (for example India will benefit, while the rest of South Asia will lose out). If poor countries emerge as net losers, it could stem their enthusiasm for the Doha Development Agenda and jeopardise liberalisation of trade in future.
Therefore, he argues that the poorest nations are better off with high domestic subsidies in developed countries so long as they get preferential access, while larger developing country exporters are kept out by high tariffs. He cites the European Union’s Everything But Arms (EBA) initiative (or more precisely, Everything but Arms, Bananas, Rice and Sugar initiative!), that gives duty and quota free access for LDCS to sell at the high prices prevalent in the EU markets.
William Cline of the Centre for Global Development draws diametrically different conclusions about the impact of trade liberalisation on the basis of his empirical analysis and economic modeling in his book ‘Trade Policy and Global Poverty’ (2004). He argues that liberalisation of agricultural markets is the most important way to reduce global poverty as three-fourth of the world’s poor (living on less than US$2 a day) are in rural areas. Rural poor are more likely to be dependent on farming and any increase in export opportunities will increase their income. The gains of the rural poor will outweigh the losses of the urban poor and there will also be a redistribution of income from cities to villages. Cline estimates that global free trade could increase agricultural prices by 10%, hike real wages of unskilled labour in developing countries by 5% and boost global economic welfare of developing countries by $90 billion annually. This, he estimates could pull 200 million people out of poverty, or 650 million people, if one factors in capital investment and a longer term period of 10-20 years. Welfare gains are highest from liberalisation of agriculture, followed by textiles and apparels.
The US$90 billion that developing countries could gain will dwarf the US$ 50 billion that developing countries receive as aid. Yet another argument, in favour of freer and fairer trade over aid and preferences. Interestingly, this corroborates Oxfam’s calculation in its trade report in 2002 (Rigged Rules, Double Standards) that put the loss to developing countries due to rich country trade restrictions at US$100 billion a year. Cline cites evidence that only a sixth of the world’s poor live in the net food importing countries and estimates that over 130 million people could be pulled out of poverty in India and China alone. If this were put in the perspective of the global target of halving poverty by 2015, it would reflect significant advances in the two biggest battlefields. Here, one of Pangariya’s arguments merits consideration – trade liberalisation has adjustment costs that could impact smaller and poorer countries more. Hence, compensation programmes need to be designed smartly to factor these costs in and prevent these countries from being disenchanted.
However, to cite these adaptation pangs and static losses to net food importing countries as reasons enough to preserve status quo and debunk trade liberalisation where it is needed most, is strange. As strange as the American comparative advantage in rice. Moreover, it cannot be ignored that many LDCs are net food importers today due to pressures from beyond their borders. Rice imports to Haiti, an LDC, increased by 150% between 1994 and 2003 after the International Monetary Fund forced it to cut rice tariffs from 35% to 3%. Ironically, three out of four plates of rice consumed in Haiti today come from the US. Any guesses on the number of empty plates in the homes of impoverished Haitian rice farmers?
Panagariya, A., ‘Agricultural Liberalisation and the Developing Countries: Debunking the fallacies’ , 2004
Cline, W., ‘Trade Policy and Global Poverty’, Centre for Global Development, 2004
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