Intellectual Property Rights Can Spur Developing Countries and World Growth
August 16, 2000
||Keith E. Maskus
Washington, DCProtection of intellectual property rights (IPRs) is a major and pervasive domestic and international issue:
A federal court recently denied an extension of Eli Lilly's US patent for Prozac, clearing the way for generic competition by February 2001 and driving Lilly's share price down by 31 percent;
Litigation will determine whether Napster, which currently has over 20 million users who freely download music with market values estimated at billions of dollars, constitutes illegal copyright infringement;
The United States remains concerned about pending legislation in South Africa that could significantly erode the value of pharmaceutical patents but both the United States and the European Union are considering permitting parallel imports of prescription drugs to ease the price burden on their own consumers.
Such issues and a wide range of others are discussed in Intellectual Property Rights in the Global Economy, an extensive Institute study of the economics of IPRs by Visiting Fellow Keith E. Maskus. Maskus finds that implementation of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) in the World Trade Organization (WTO) will create more than $5.8 billion per year in additional licensing profits for American manufacturers that own patents abroad. Similar gains should emerge from the licensing of copyrights and trademarks.
In the short term, firms in developing countries will have to pay higher fees for technology licenses and production rights. In the longer term, however, Maskus finds that stronger IPRs in major industrializing economies such as China, Brazil, and India should produce a significant growth bonus of as much as 0.5 percent per year for those countries through enhanced inflows of trade, foreign direct investment (FDI), and licensing. On the other hand, the least-developed countries may not achieve such a gain and may indeed be harmed by the increased exercise of market power.
Cooperative international efforts to address widespread concerns about the impact of stronger patents, copyrights, trademarks, and trade secrets on the prices of medicines and the costs of advanced technologies are extremely important. Programs to transfer vaccines and medicines for AIDS and other diseases to the poorest countries, on affordable terms, are perhaps most significant. Maskus proposes expanded use of public monies and private donations for procuring such products, or encouraging their distribution at marginal cost, while safeguarding the returns to investment through exclusive rights for patent holders.
A major finding of the study is that developing countries will recognize significant gains in the long term from stronger IPRs. Rather than rolling back key provisions of TRIPs, these countries should focus on implementing the new standards and adequately complementing them with safeguards and pro-growth policies.
Maskus makes the following essential points:
TRIPs is a major watershed in both the international treatment of IPRs and in global economic regulation. This is the first international agreement to set out comprehensive minimum standards of protection and enforcement across all areas of intellectual property, and to make those standards subject to dispute settlement. It represents the leading edge of the new attempts to incorporate disciplines on domestic economic regulation into the multilateral trading system.
Stronger IPRs are central in the increasing globalization of economic activity but their use is unbalanced. Data demonstrate that there is a sharply rising demand for protection of intellectual information in both developed economies and in middle-income, rapidly growing developing economies. This demand comes from both multinational enterprises and domestic innovative interests in developing countries that are pushing for stronger IPRs.
The short-run effect of TRIPs will be to transfer significant profits from imitators in lagging countries to rights-holders in advanced countries, especially the United States. For example, the patent provisions of TRIPs would have transferred an estimated $5.8 billion (in 1995 prices) in net licensing profits to American inventors in 1988. Numerous developed nations, and nearly all developing countries, would have experienced a net outward transfer.
In contrast, substantial long-term gains could be realized on a widespread basis. Econometric evidence in the book demonstrates that technology transfer through trade flows, FDI, and licensing reacts positively and significantly to the strength of IPRs in developing countries. Many developing countries should thus gain a significant growth premium as global IPRs are strengthened. However, this finding pertains mainly to large industrializing economies and not to the least developed countries.
TRIPs does not require a "one size fits all" approach to IPRs. Although TRIPs calls for minimum standards of protection, substantial flexibility remains for countries to implement regimes that are most appropriate for their development needs, keeping in mind the potential for gains from dynamic competition. Developing economies have a number of models to choose from and need not adopt the high standards found in the United States and the European Union.
The potential for long-term gains from enhanced IPR systems depends crucially on related policies. Adopting stronger IPRs alone is insufficient to attract more innovation and technology transfer. Critical supporting regimes include additional liberalization of trade and FDI, stronger commitments to education and human-capital acquisition, modernization of technology infrastructures and methods for commercializing invention, and effective competition policies.
Despite the potential growth benefits for many developing countries detailed in the book, aspects of the emerging IPR system remain intensely controversial. The resolution of these controversies will determine the future path of global IPR protection. Maskus offers analytical commentary on the following points, among others:
Developing countries need to be given a greater sense of ownership and involvement in the IPR system. Many see TRIPs as primarily a mechanism for shifting profits to creative interests in rich countries. Thus it is important for developed countries and multilateral organizations to provide adequate technical and financial assistance for implementation of the new standards in developing nations, to remove impediments to future technology flows, and to meet and extend their own commitments to liberalize market access for products of interest to poorer countries (notably apparel and agriculture). Assistance should aim to develop rights and opportunities suitable to the needs of entrepreneurs, inventors, and artists in poor economies. Analysis is also needed of potential mechanisms for securing the rights of developing countries to export interests of their own such as geographical indications, traditional knowledge, and genetic resources.
Sensible methods need to be found for balancing rights of patent holders in pharmaceuticals against users' needs for product availability at reasonable cost. Evidence in the book points to potentially large increases in drug prices in developing countries as patents are implemented. Governments should work to offset these impacts by using innovative procurement programs. In particular, development and transfer of treatments and vaccines for diseases in the poorest countries should be expanded via public-private partnerships.
WTO members should not rush to expand multilateral protection in controversial areas until we know more about how new systems function. Requiring broad scope for biotechnology patents, and extending them to plant and animal varieties, could damage the interests of lagging countries in return for little gain in innovation. Many countries need to adopt or strengthen systems of plant breeders' rights and it would be premature to require global patents in this area before such systems are given a chance to work. Neither is it sensible at this time to push for a global code on territorial exhaustion of rights (parallel imports).